Losses and Loss Adjustment Expense

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



(In thousands)	March 31, 2016		December 31, 2015
Reserves for losses by category:
Prime	$	438,598	$	480,481
Alt-A	183,189		203,706
A minus and below	116,835		129,352
IBNR and other (1)	79,051		83,066
LAE	23,600		26,108
Reinsurance recoverable (2)	8,239		8,286
Total primary reserves	849,512		930,999
Pool	38,843		42,084
IBNR and other	1,050		1,118
LAE	1,227		1,335
Total pool reserves	41,120		44,537
Total First-lien reserves	890,632		975,536
Second-lien and other (3)	716		863
Total reserve for losses	$	891,348	$	976,399

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


(2)	Represents ceded losses on captive transactions, the QSR Transactions and the Single Premium QSR Transaction.


(3)	Does not include our Second-lien premium deficiency reserve 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 premium deficiency reserve, for the periods indicated:



	Three Months Ended March 31,
(In thousands)	2016			2015
Balance at beginning of period	$	976,399		$	1,560,032
Less reinsurance recoverables (1)	8,286			26,665
Balance at beginning of period, net of reinsurance recoverables	968,113			1,533,367
Add losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2)	56,171			80,437
Prior years	(13,504		)	(35,360		)
Total incurred	42,667			45,077
Deduct paid claims and LAE related to:
Current year (2)	65			—
Prior years	127,606			207,095
Total paid	127,671			207,095
Balance at end of period, net of reinsurance recoverables	883,109			1,371,349
Add reinsurance recoverables (1)	8,239			13,365
Balance at end of period	$	891,348		$	1,384,714

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(1)	Related to ceded losses recoverable, on captive reinsurance transactions, the QSR Transactions and the Single Premium QSR Transaction, if any. 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.

2016 Activity

Our loss reserves at March 31, 2016 declined as compared to December 31, 2015, primarily as a result of the volume of paid claims and Cures 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 three months of 2016, and they were impacted primarily by the number of new primary default notices received in the quarter and our related gross Default to Claim Rate assumption applied to those new defaults, which was approximately 12.5%. The impact to incurred losses from default notices reported in the first quarter of 2016 was partially mitigated by favorable reserve development on prior year defaults, which was driven primarily by a reduction during the period in certain Default to Claim Rate assumptions for these prior year defaults. The reductions in Default to Claim Rate assumptions resulted primarily from observed trends, including higher Cures than were previously estimated. The positive development in prior year defaults was partially offset by an increase in estimated severity rates from those used at December 31, 2015.

Total claims paid decreased for the three months ended March 31, 2016, compared to the same period in 2015, primarily due to the claim payments associated with the BofA Settlement Agreement (discussed below) in 2015, which elevated claims paid from February 2015 through December 31, 2015.

2015 Activity

During the first three months of 2015, reserves established for new default notices were the primary driver of our total incurred loss, and they were impacted primarily by the number of new primary default notices received in the quarter and our related gross Default to Claim Rate assumption applied to those new defaults, which was approximately 15% during that period. In addition, we experienced favorable reserve development on prior year defaults due primarily to a reduction in certain Default to Claim Rate assumptions.

Claims paid for the three months ended March 31, 2015 include $98.5 million related to the implementation of the BofA Settlement Agreement beginning in February 2015.

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% (43% excluding pending claims) at March 31, 2016 and December 31, 2015. During the three months ended March 31, 2016, our gross Default to Claim Rate assumption for new primary defaults was modestly reduced from approximately 13% as of December 31, 2015, to approximately 12.5%. As of March 31, 2016, our gross Default to Claim Rates on our primary portfolio ranged from 12.5% 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 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 on the volume of future Rescissions and Claim Denials.

Loss Mitigation

For the three months ended March 31, 2016, Rescissions and Claim Denials, net of Reinstatements for primary loans totaled $5.6 million. During the three months ended March 31, 2015, the implementation of the BofA Settlement Agreement resulted in Reinstatements exceeding Rescissions and Claim Denials for claims on first-lien mortgage loans. Reinstatements, net of Rescissions and Claim Denials, totaled $14.7 million for the three months ended March 31, 2015.

Although our estimates of future Rescissions and Claim Denials have generally been declining, our Rescissions and Claim Denials continue to reduce 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 March 31, 2016 and December 31, 2015 by approximately $67 million and $69 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. Our assumptions also reflect the estimated future 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 of $22.8 million and $26.6 million at March 31, 2016 and December 31, 2015, respectively, includes reserves for this expected activity.

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 and implementation was completed by December 31, 2015. See Note 10 of Notes to Consolidated Financial Statements in our 2015 Form 10-K for additional information about the BofA Settlement Agreement.

Freddie Mac Agreement

At March 31, 2016 and December 31, 2015, Radian Guaranty had $75.3 million and $74.7 million, respectively, in a 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. 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 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. As of March 31, 2016, we have approximately $57.3 million, recorded in reserve for losses, that we expect to be paid to Freddie Mac from the funds expected to be remaining in the collateral account as of the August 29, 2017 measurement date.