Losses and Loss Adjustment Expenses

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:



	Year Ended December 31,
(In thousands)	2015			2014
Reserves for losses by category:
Prime	$	480,481		$	700,174
Alt-A	203,706			292,293
A minus and below	129,352			179,103
IBNR and other	83,066		(1)	223,114
LAE	26,108			56,164
Reinsurance recoverable (2)	8,286			26,665
Total primary reserves	930,999			1,477,513
Pool	42,084			75,785
IBNR and other	1,118			1,775
LAE	1,335			3,542
Total pool reserves	44,537			81,102
Total first-lien reserves	975,536			1,558,615
Second-lien and other (3)	863			1,417
Total reserve for losses	$	976,399		$	1,560,032

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(1)	Primarily related to expected payments under the Freddie Mac Agreement.


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


(3)	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:



	Year Ended December 31,
(In thousands)	2015			2014				2013
Mortgage Insurance
Balance at January 1	$	1,560,032		$	2,164,353			$	3,083,608
Less reinsurance recoverables (1)	26,665			38,363				83,238
Balance at January 1, net of reinsurance recoverables	1,533,367			2,125,990				3,000,370
Add losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2)	229,061			351,184			(3)	519,188		(3)
Prior years	(29,647		)	(105,545		)		45,460
Total incurred	199,414			245,639				564,648
Deduct paid claims and LAE related to:
Current year (2)	10,837			13,562				35,108
Prior years	753,831			824,700				1,403,920
Total paid	764,668			838,262				1,439,028
Balance at end of period, net of reinsurance recoverables	968,113			1,533,367				2,125,990
Add reinsurance recoverables (1)	8,286			26,665				38,363
Balance at December 31	$	976,399		$	1,560,032			$	2,164,353

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

(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 years ended December 31, 2014 and 2013, 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 $71.8 million and $65.0 million, respectively, with equal and offsetting adjustments to the amount previously reported for default notices reported and unreported in prior years.

2015 Activity

Our loss reserve declined in 2015 from December 31, 2014, primarily as a result of the volume of paid claims, Cures and Rescissions and Claim Denials continuing to outpace new default notices received. Total incurred losses for 2015 decreased by $46.2 million as compared to 2014. This decrease was driven primarily by a continued decline in the number of new current year defaults and a decrease in the Default to Claim Rate assumptions applied to such defaults. During the year ended December 31, 2015, we reduced our gross Default to Claim Rate assumption for new primary defaults from 16% to approximately 13%, based on continued improvement observed in actual claim development trends. This favorable impact to current year defaults was partially offset by a decline in the favorable reserve development from prior year defaults, which, although still positive, provided less of a benefit to our provision for losses in 2015 as compared to 2014. The $29.6 million favorable development on prior year defaults observed in 2015 was driven primarily by a decrease in our actual and estimated Default to Claim Rate assumptions on prior year defaults, as a result of higher Cures than were previously estimated, partially offset by a decline in our estimates for future Rescissions and Claim Denials.

Total paid claims decreased for 2015 as compared to 2014 primarily due to the overall decline in defaulted loans and ongoing reduction in pending claims.

2014 Activity

Our loss reserve declined in 2014 from December 31, 2013, primarily as a result of the volume of paid claims, Cures and Rescissions and Claim Denials outpacing 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 2013 is consistent with the overall decline in defaulted loans.

2013 Activity

Our loss reserve also declined in 2013 from December 31, 2012, 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 Rescissions and Claim Denials outpaced new default notices received. Total paid claims for 2013 were impacted 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 negatively impacted by reserve development on prior year defaults, including an initial loss of $22 million related to prior year defaults included in the Freddie Mac Agreement.

Default to Claim Rate

Our aggregate weighted average Default to Claim Rate assumption (net of Claim Denials and Rescissions) used in estimating our primary reserve for losses was 46% (42% excluding pending claims) at December 31, 2015 compared to 52% (47% excluding pending claims) at December 31, 2014. The change in our Default to Claim Rate in 2015 resulted primarily from a decrease in the proportion of pending claims, which have higher Default to Claim Rates, and a decrease in the assumed gross Default to Claim Rate for new defaults from 16% to approximately 13%, as noted above. Our gross Default to Claim Rates on our primary portfolio ranged from approximately 13% for new defaults, to 65% for defaults not in Foreclosure Stage, and 81% for Foreclosure Stage Defaults. 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 grouped according to the period in which the default occurred, as measured by the progress toward foreclosure sale and the number of months in default. 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; in 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, as described below.

Loss Mitigation

The implementation of the BofA Settlement Agreement resulted in Reinstatements exceeding Rescissions and Claim Denials for first-lien claims during 2015. Reinstatements, net of Rescissions and Claim Denials, for primary loans totaled $64.5 million for 2015. Rescissions and Claim Denials, net of Reinstatements totaled $144.7 million for 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 December 31, 2015 and 2014 by approximately $69 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 December 31, 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, Claim Denial and Claim Curtailment 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 $26.6 million and $163.6 million at December 31, 2015 and 2014, respectively. As of December 31, 2015, the IBNR reserve estimate of $26.6 million included approximately $3.0 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 December 31, 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 December 31, 2015 included an estimate of future Reinstatements of previous Claim Denials, Rescissions and Claim Curtailments of $13.3 million, $0.6 million and $2.1 million, respectively. These IBNR reserves relate to $41.9 million of claims that were denied within the preceding 12 months, $42.8 million of policies rescinded within the preceding 24 months, and $22.7 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 Rescissions. Our accrued liability for such refunds, which is included within other liabilities on our consolidated balance sheets, was $2.3 million and $9.0 million as of December 31, 2015 and 2014, respectively.

Sensitivity Analysis

We considered the sensitivity of first-lien loss reserve estimates at December 31, 2015 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 101.4% of risk exposure at December 31, 2015), we estimated that our loss reserves would change by approximately $8.2 million at December 31, 2015. For every one percentage point change in our overall primary net Default to Claim Rate (which we estimate to be 46% at December 31, 2015, including our assumptions related to Rescissions and Claim Denials), we estimated a $17.4 million change in our loss reserves at December 31, 2015.

BofA Settlement Agreement

On September 16, 2014, Radian Guaranty entered into the BofA Settlement Agreement 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 except with respect to certain limited rights of cancellation (described above). During 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.

The BofA Settlement Agreement provides that all claims decisions by Radian Guaranty on Legacy Loans (including claims paid, coverage Rescissions, Claim Denials and Claim 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 limit Rescissions, Claim Denials or Claim 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 Claim 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 Claim Curtailment Loans”) and any Future Legacy Loans serviced by a servicer other than the Insureds (a “Protected Claim 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 Claim 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 Claim Curtailments (excluding Protected Claim Curtailments, which may continue in the ordinary course) and, to the extent any Claim Curtailments previously have been effected on such loans, Radian Guaranty will pay a reimbursement amount equal to the Claim Curtailment amount. The BofA Settlement Agreement does not affect Radian Guaranty’s right to effect Rescissions or Claim Denials on any Servicing Only Loans and any such Rescissions or Claim 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.

Freddie Mac Agreement

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 our future Loss Mitigation Activity on these loans.

At December 31, 2015 and 2014, Radian Guaranty had $74.7 million and $209.3 million, respectively, in the collateral account pursuant to the Freddie Mac Agreement. 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 that agreement. In accordance with these provisions, Radian Guaranty withdrew approximately $135.9 million from this account in October 2015 related to Loss Mitigation Activity that had become final as of August 31, 2015. Following this withdrawal, if, as of August 29, 2017, the amount of additional Loss Mitigation Activity that has become final in accordance with the Freddie Mac Agreement is less than approximately $74.0 million, then any shortfall will be paid on that date to Freddie Mac from the funds remaining in the collateral account, subject to certain adjustments designed to allow for any Loss Mitigation Activity that has not become final or any claims evaluation that has not been completed as of that date. Through December 31, 2015, approximately $4.4 million of additional Loss Mitigation Activity had become final in accordance with the Freddie Mac Agreement and approximately $8.9 million of additional submitted claims had been rescinded, denied, curtailed or cancelled, but were not yet considered final in accordance with the Freddie Mac Agreement. We currently expect that Radian Guaranty will pay approximately $57.5 million to Freddie Mac from the funds remaining in the collateral account, due to our expected shortfall in Loss Mitigation activity. This amount is included in our reserve for losses and loss adjustment expenses as of December 31, 2015.