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)	September 30, 2017		December 31, 2016
Reserves for losses by category:
Prime	$	296,885	$	379,845
Alt-A	112,033		148,006
A minus and below	78,048		101,653
IBNR and other (1)	13,085		71,107
LAE	14,687		18,630
Reinsurance recoverable (2)	7,445		6,816
Total primary reserves	522,183		726,057
Pool	18,630		31,853
IBNR and other	14,576		673
LAE	550		932
Reinsurance recoverable (2)	25		35
Total pool reserves	33,781		33,493
Total First-lien reserves	555,964		759,550
Other (3)	524		719
Total reserve for losses	$	556,488	$	760,269

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(1)

At December 31, 2016, primarily related to expected payments under the Freddie Mac Agreement. During the third quarter of 2017, the scheduled final settlement date under the Freddie Mac Agreement occurred and therefore, except for loans with loss mitigation and claims activity already in process, most of the loans subject to the Freddie Mac Agreement were removed from RIF and IIF because the insurance no longer remains in force. See “—Freddie Mac Agreement,” below for additional information.


(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:



	Nine Months Ended September 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)	145,798				152,320
Prior years	(45,331		)		(3,906		)
Total incurred	100,467				148,414
Deduct: Paid claims and LAE related to:
Current year (2)	3,639				2,725
Prior years	301,228				298,352
Total paid	304,867			(3)	301,077
Balance at end of period, net of reinsurance recoverables	549,018				815,450
Add: Reinsurance recoverables (1)	7,470				6,484
Balance at end of period	$	556,488			$	821,934

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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.


(3)	Includes the payment of $54.8 million made in connection with the scheduled final settlement of the Freddie Mac Agreement in the third quarter of 2017.

Reserve Activity

2017 Activity

Our loss reserves at September 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 nine months ended September 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 10.5% as of September 30, 2017. The provision for losses during the first nine 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 the assumptions 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 incremental IBNR reserves of $14.2 million to reflect the estimated payment for future losses, primarily on performing loans in our Legacy Portfolio that are likely to be affected by an expected pool commutation.

Total claims paid increased for the nine months ended September 30, 2017, compared to the same period in 2016, primarily as a result of payments that, as expected, were made in connection with the final settlement of the Freddie Mac Agreement in the third quarter of 2017. See “—Freddie Mac Agreement” below for additional information.

During the third quarter of 2017, Hurricanes Harvey and Irma caused extensive property damage to areas of Texas, Florida and Georgia, as well as other general disruptions including power outages and flooding. At September 30, 2017, our total primary mortgage insurance exposure to mortgages in counties affected by these storms and subsequently designated as FEMA Designated Areas is approximately $4.4 billion of RIF on approximately $16.8 billion of IIF. This exposure represents approximately 8.8% of our primary mortgage insurance RIF as of September 30, 2017. Although the mortgage insurance we write protects the lenders from a portion of losses resulting from loan defaults, it does not provide protection against property loss or physical damage. Our Master Policies contain an exclusion against physical damage, including damage caused by floods or other natural disasters. Depending on the policy form and circumstances, we may, among other things, deduct the cost to repair or remedy physical damage above a de minimis amount from a claim payment and/or, under certain circumstances, deny a claim where (i) the property underlying a mortgage in default is subject to unrestored physical damage or (ii) the physical damage is deemed to be the principal cause of default. As of September 30, 2017, our provision for losses has not been materially impacted by increased defaults in FEMA Designated Areas related to Hurricanes Harvey and Irma. However, the future reserve impact may be affected by various factors, including the pace of economic recovery in the FEMA Designated Areas.

2016 Activity

Our loss reserves at September 30, 2016 declined as compared to December 31, 2015, primarily because the amount of paid claims outpaced 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 nine months ended September 30, 2016, and they were impacted primarily 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 approximately 12.0% as of September 30, 2016. The impact to incurred losses from reserve development on default notices reported in prior years was not significant during the first nine months of 2016.

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 40% (38% excluding pending claims) at September 30, 2017, and 42% (40% excluding pending claims) at December 31, 2016. This decrease was primarily due to a shift in the mix of defaults during the nine months ended September 30, 2017, with a slightly lower proportion of pending claims in our total inventory, as well as the decrease in our gross Default to Claim Rate assumptions. During the nine months ended September 30, 2017, our gross Default to Claim Rate assumption for new primary defaults was reduced from 12% as of December 31, 2016, to 10.5%. As of September 30, 2017, our gross Default to Claim Rates on our primary portfolio ranged from 10.5% 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 continue to be 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 anticipated future Loss Mitigation Activity is not expected to mitigate our paid losses to the same extent as in the years immediately following the financial crisis. Our estimate of net future Loss Mitigation Activities reduced our loss reserve as of September 30, 2017 and December 31, 2016 by approximately $23 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 $24.8 million and $14.3 million at September 30, 2017 and December 31, 2016, respectively, includes reserves for this activity, and, with respect to our IBNR estimate at September 30, 2017, also includes $14.2 million to reflect the estimated payment for future losses from an expected pool commutation, as discussed above.

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, Legacy Loans where a claim decision has been or will be communicated by Radian Guaranty after February 13, 2013), 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 December 31, 2016, Radian Guaranty had $63.9 million in a collateral account invested in and classified as part of our trading securities and pledged to cover Loss Mitigation Activity on the loans subject to the Freddie Mac Agreement. During the third quarter of 2017, the scheduled final settlement date under the Freddie Mac Agreement occurred and, as expected, we paid $54.8 million to Freddie Mac, which reduced the remaining balance in the collateral account to $5.5 million at September 30, 2017. These amounts were invested in and classified as short-term investments and pledged to cover Loss Mitigation Activity and pending claims activity already in process but not yet finalized. As of September 30, 2017, we have $2.8 million remaining in reserve for losses that we expect to pay to Freddie Mac from the remaining funds in the collateral account.