Losses and Loss Adjustment Expense

All of the balance and activity of our consolidated reserve for losses and LAE 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)	June 30, 2017		December 31, 2016
Reserves for losses by category:
Prime	$	318,169	$	379,845
Alt-A	124,477		148,006
A minus and below	85,283		101,653
IBNR and other (1)	69,620		71,107
LAE	15,492		18,630
Reinsurance recoverable (2)	7,341		6,816
Total primary reserves	620,382		726,057
Pool	29,099		31,853
IBNR and other	658		673
LAE	843		932
Reinsurance recoverable (2)	30		35
Total pool reserves	30,630		33,493
Total First-lien reserves	651,012		759,550
Other (3)	579		719
Total reserve for losses	$	651,591	$	760,269

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


(2)	Represents ceded losses on captive reinsurance 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 our Second-lien premium deficiency reserve, for the periods indicated:



	Six Months Ended June 30,
(In thousands)	2017			2016
Balance at beginning of period	$	760,269		$	976,399
Less: Reinsurance recoverables (1)	6,851			8,286
Balance at beginning of period, net of reinsurance recoverables	753,418			968,113
Add: Losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2)	88,906			100,999
Prior years	(24,721		)	(8,438		)
Total incurred	64,185			92,561
Deduct: Paid claims and LAE related to:
Current year (2)	1,027			632
Prior years	172,356			217,740
Total paid	173,383			218,372
Balance at end of period, net of reinsurance recoverables	644,220			842,302
Add: Reinsurance recoverables (1)	7,371			6,077
Balance at end of period	$	651,591		$	848,379

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

Reserve Activity

2017 Activity

Our loss reserves at June 30, 2017 declined as compared to December 31, 2016, primarily as a result of the amount of paid claims and Cures continuing to outpace losses incurred related to new default notices reported in the current year. Reserves established for new default notices were the primary driver of our total incurred loss for the six months ended June 30, 2017, and they were primarily impacted by the number of new primary default notices received in the period and our related gross Default to Claim Rate assumption applied to those new defaults, which was 11.0% as of June 30, 2017. The provision for losses during the first six months of 2017 was positively impacted by favorable reserve development on prior year defaults, which was primarily driven by a reduction during the period in certain Default to Claim Rate assumptions for these prior year defaults compared to those used at December 31, 2016. The reductions in Default to Claim Rate assumptions resulted from observed trends, primarily higher Cures than were previously estimated. The positive development in prior year defaults was partially offset by a decrease in estimated rates of future Loss Mitigation Activities compared to those used at December 31, 2016.

Total claims paid decreased for the six months ended June 30, 2017, compared to the same period in 2016, consistent with the ongoing decline in the outstanding default inventory.

2016 Activity

Our loss reserves at June 30, 2016 declined as compared to December 31, 2015, primarily as a result of the volume of paid claims and Cures exceeding new default notices received. Reserves established for new default notices were the primary driver of our total incurred loss for the six months ended June 30, 2016, and they were primarily impacted by the number of new primary default notices received in the period and our related gross Default to Claim Rate assumption applied to those new defaults, which was 12.5%. The impact to incurred losses from default notices reported in the first half of 2016 was partially mitigated by favorable reserve development on prior year defaults, driven primarily by a reduction during the first quarter 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 impact of the positive development in prior year defaults was partially offset by a slight increase in estimated severity rates from those used at December 31, 2015, based on observed trends.

Reserve Assumptions

Default to Claim Rate

Our aggregate weighted average Default to Claim Rate assumption for our primary loans (net of Claim Denials and Rescissions) used in estimating our primary reserve for losses was 43% (41% excluding pending claims) at June 30, 2017, and 42% (40% excluding pending claims) at December 31, 2016. This increase was primarily due to a shift in the mix of defaults during the six months ended June 30, 2017, with a slightly higher proportion of pending claims in our total inventory as well as a slightly lower rate of Rescissions and Claim Denials, both as of June 30, 2017 compared to December 31, 2016. This increase was partially offset by the decrease in our gross Default to Claim Rate assumptions for new primary defaults. During the six months ended June 30, 2017, our gross Default to Claim Rate assumption for new primary defaults was reduced from 12% as of December 31, 2016, to 11%. As of June 30, 2017, our gross Default to Claim Rates on our primary portfolio ranged from 11% for new defaults, up to 62% for defaults not in foreclosure stage, and 81% for Foreclosure Stage Defaults.

Loss Mitigation

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. Consideration is also given for differences in characteristics between those previously rescinded policies and denied claims and the loans remaining in our defaulted inventory, as well as the estimated impact of the BofA Settlement Agreement, which is discussed below.

Although our estimates of future Loss Mitigation Activities have been declining, they remain elevated compared to levels experienced before 2009. Since 2009, the elevated levels of our rate of Rescissions, Claim Denials and Claim Curtailments have significantly reduced our paid losses and have resulted in a reduction in our loss reserve. 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 recent years. Our estimate of net future Loss Mitigation Activities reduced our loss reserve as of June 30, 2017 and December 31, 2016 by approximately $25 million and $39 million, respectively. The amount of estimated Loss Mitigation Activities incorporated into our reserve analysis at any point in time is affected by a number of factors, including our estimated rate of Rescissions, Claim Denials and Claim Curtailments on future claims, as well as 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 discussed below.

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 of $12.8 million and $14.3 million at June 30, 2017 and December 31, 2016, respectively, includes reserves for this activity.

We also accrue for the premiums that we expect to refund to our lender customers in connection with our estimated Rescissions.

Agreements

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 and was completed by December 31, 2015. Except for certain limited circumstances, Radian Guaranty agreed that with respect to Future Legacy Loans (as defined in and subject to the agreement), 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. See Note 11 of Notes to Consolidated Financial Statements in our 2016 Form 10-K for additional information about the BofA Settlement Agreement.

Freddie Mac Agreement

At June 30, 2017 and December 31, 2016, Radian Guaranty had $64.3 million and $63.9 million, respectively, in a collateral account pursuant to the Freddie Mac Agreement. This collateral account, which contains investments primarily invested in and classified as part of our trading securities, is pledged to cover Loss Mitigation Activity on the loans subject to the Freddie Mac Agreement. If, as we expect, the amount of additional Loss Mitigation Activity that has become final in accordance with the Freddie Mac Agreement is less than $61 million as of the final settlement date on August 29, 2017, then any shortfall will be paid to Freddie Mac from the funds remaining in the collateral account, subject to certain adjustments. As of June 30, 2017, we have $57.4 million recorded in reserve for losses that we expect to pay to Freddie Mac from the funds that are expected to be remaining in the collateral account as of the August 29, 2017 measurement date.