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)	2017		2016
Reserves for losses by category:
Prime	$	285,022	$	379,845
Alt-A and A minus and below	170,873		249,659
IBNR and other (1)	16,021		71,107
LAE	13,349		18,630
Reinsurance recoverable (2)	8,315		6,816
Total primary reserves	493,580		726,057
Pool	12,794		31,853
IBNR and other	278		673
LAE	356		932
Reinsurance recoverable (2)	35		35
Total pool reserves	13,463		33,493
Total First-lien reserves	507,043		759,550
Other (3)	545		719
Total reserve for losses	$	507,588	$	760,269

______________________

(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 “—Agreements—Freddie Mac Agreement,” below for additional information.


(2)	Represents ceded losses on captive reinsurance transactions, the QSR Transactions and the 2016 Single Premium QSR Transaction.


(3)	Does not include our second-lien mortgage loan PDR that is included in other liabilities.

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



	Year Ended December 31,
(In thousands)	2017				2016			2015
Balance at January 1,	$	760,269			$	976,399		$	1,560,032
Less: Reinsurance recoverables (1)	6,851				8,286			26,665
Balance at January 1, net of reinsurance recoverables	753,418				968,113			1,533,367
Add: Losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2)	185,486				206,383			229,061
Prior years	(49,286		)		(3,516		)	(29,647		)
Total incurred	136,200				202,867			199,414
Deduct: Paid claims and LAE related to:
Current year (2)	25,011				11,410			10,837
Prior years	365,369				406,152			753,831
Total paid	390,380			(3)	417,562			764,668
Balance at end of period, net of reinsurance recoverables	499,238				753,418			968,113
Add: reinsurance recoverables (1)	8,350				6,851			8,286
Balance at December 31,	$	507,588			$	760,269		$	976,399

______________________


(1)	Related to ceded losses recoverable, if any, on captive reinsurance transactions, the QSR Transactions and the 2016 Single Premium QSR Transaction. 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. For 2017, includes payments made on pool commutations, in some cases for loans not previously in default.


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

Reserve Activity

2017 Activity

Our loss reserves at December 31, 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 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, except as discussed below for FEMA Designated Areas associated with Hurricanes Harvey and Irma, declined from 12% at December 31, 2016 to 10% at December 31, 2017. The provision for losses during 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.

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 December 31, 2017, our total primary mortgage insurance exposure to mortgages in counties affected by these storms and subsequently designated as FEMA Designated Areas is approximately $4.6 billion of RIF on approximately $17.4 billion of IIF. This exposure represents approximately 9% of our primary mortgage insurance RIF as of December 31, 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. While we observed an increase in new primary defaults from FEMA Designated Areas associated with Hurricanes Harvey and Irma following those two natural disasters, we expect most of these to cure within the next 12 months, and at rates higher than our general population of defaults. We therefore assigned a 3% Default to Claim Rate assumption to the new primary defaults from FEMA Designated Areas associated with Hurricanes Harvey and Irma that were reported subsequent to those two natural disasters. These incremental defaults did not have a material impact on our provision for losses as of December 31, 2017. However, the future reserve impact may be affected by various factors, including the pace of economic recovery in the FEMA Designated Areas.

Total claims paid decreased for 2017, compared to 2016, consistent with the ongoing decline in outstanding default inventory, partially offset by payments that, as expected, were made in connection with the final settlement of the Freddie Mac Agreement in the third quarter of 2017. See “—Agreements—Freddie Mac Agreement” below for additional information.

2016 Activity

Our loss reserves at December 31, 2016 declined as compared to December 31, 2015, primarily as a result of the amount of paid claims continuing to exceed 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 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 declined from 13% at December 31, 2015 to 12% as of December 31, 2016. The impact to incurred losses from reserve development on default notices reported in prior years was not significant during 2016.

Total claims paid decreased for 2016 compared to 2015, primarily due to the elevated claim payments in 2015 associated with the BofA Settlement Agreement (discussed below).

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 having exceeded new default notices received. During the year ended December 31, 2015, we reduced our gross Default to Claim Rate assumption for new primary defaults from 16% to 13%, based on continued improvement observed in actual claim development trends. Favorable reserve development on prior year defaults partially mitigated the provision for losses from new default notices received in 2015. 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.

Reserve Assumptions

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 31% (29% excluding pending claims) at December 31, 2017 compared to 42% (40% excluding pending claims) at December 31, 2016. The change in our Default to Claim Rate in 2017 resulted primarily from: (i) the lower Default to Claim Rate of 3% on new primary defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma subsequent to those two natural disasters; (ii) a decrease in the proportion of pending claims, which have higher Default to Claim Rates; and (iii) a decrease in the assumed gross Default to Claim Rate for new primary defaults that were not located in FEMA Designated Areas associated with Hurricanes Harvey and Irma, from 12% to 10%, as of December 31, 2017. As of December 31, 2017, with the exception of new primary defaults in FEMA Designated Areas associated with Hurricanes Harvey and Irma, our gross Default to Claim Rates on our primary portfolio ranged from 10% for new defaults, to 62% for other defaults not in Foreclosure Stage, and 81% for Foreclosure Stage Defaults. As of December 31, 2016, these gross Default to Claim Rates ranged from 12% for new defaults, to 62% for other 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 estimated Default to Claim Rate is generally based on our recent experience. Consideration is also given for differences in characteristics between those rescinded policies and denied claims and the loans remaining in our defaulted inventory.

Loss Mitigation

Although our estimates of future Loss Mitigation Activities have been declining, they remain elevated compared to levels experienced before 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. Our estimate of net future Loss Mitigation Activities reduced our loss reserve as of December 31, 2017 and 2016 by approximately $21 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 not only our estimated rate of Rescissions, Claim Denials and Claim Curtailments 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 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 of $10.4 million and $14.3 million at December 31, 2017 and 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.

Sensitivity Analysis

We considered the sensitivity of first-lien loss reserve estimates at December 31, 2017 by assessing the potential changes resulting from a parallel shift in Claim Severity and Default to Claim Rate estimates 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 97.6% of risk exposure at December 31, 2017), we estimated that our loss reserves would change by approximately $4.8 million at December 31, 2017. Assuming all other factors remain constant, for every one percentage point change in our overall primary net Default to Claim Rate (which we estimate to be 31% at December 31, 2017, including our assumptions related to Rescissions and Claim Denials), we estimated a $14.2 million change in our loss reserves at December 31, 2017.

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 the specific population of loans covered by the agreement. Implementation of the BofA Settlement Agreement commenced on February 1, 2015 and cash payments under the BofA Settlement Agreement were effectively completed by December 31, 2015.

The BofA Settlement Agreement finalized claims decisions (including claims paid, coverage Rescissions, Claim Denials and Claim Curtailments) on certain loans covered by the agreement (communicated on or before certain dates prior to 2015), such that they are not subject to future challenge or adjustment. For claims decisions on certain other loans (communicated after those dates), the BofA Settlement Agreement limits both prior and future Rescissions, Claim Denials or Claim Curtailments. Radian Guaranty further agreed not to assert any right to cancel coverage on certain loans for failure to initiate certain proceedings (most commonly foreclosure proceedings) within the timelines set forth in the applicable Master Policies. We do not expect a material impact to our results of operations from this agreement in the future.

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. 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 $5.6 million at December 31, 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.

Additional Disclosures

The following tables provide information as of and for the periods indicated about: (i) incurred losses, net of reinsurance; (ii) the total of IBNR liabilities plus expected development on reported claims, included within the net incurred loss amounts; (iii) the cumulative number of reported defaults; and (iv) cumulative paid claims, net of reinsurance. The default year represents the period that a new default notice is first reported to us by loan servicers, related to borrowers that missed two monthly payments.

The information about net incurred losses and paid claims development for the years ended prior to 2017 is presented as supplementary information.



	Incurred Losses, Net of Reinsurance
	Year Ended December 31,																				As of December 31, 2017
($ in thousands)																					Total of IBNR Liabilities Plus Expected Development on Reported Claims (1)		Cumulative Number of Reported Defaults (2)
	Unaudited
Default Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	1,957,510	$	1,715,144	$	1,969,581	$	2,009,551	$	2,018,794	$	2,074,295	$	2,088,719	$	2,110,922	$	2,115,083	$	2,122,647	$	2,370	215,837
2009			1,671,239		1,894,783		1,930,263		1,939,479		1,974,568		1,991,796		2,016,412		2,018,907		2,022,629		1,535		213,836
2010					1,102,856		1,215,136		1,192,482		1,195,056		1,207,774		1,220,289		1,218,264		1,219,469		958		146,324
2011							1,058,625		1,152,016		1,052,277		1,050,555		1,062,579		1,061,161		1,059,116		904		118,972
2012									803,831		763,969		711,213		720,502		715,646		714,783		756		89,845
2013											505,732		405,334		401,444		404,333		402,259		653		71,749
2014													337,784		247,074		265,891		264,620		776		58,215
2015															222,555		198,186		178,042		874		49,825
2016																	201,016		165,440		2,185		46,264
2017																			180,851		2,672		47,283
																	Total		$	8,329,856

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(1)	Represents reserves as of December 31, 2017 related to IBNR liabilities.

(2)

Represents total number of new default notices received in each calendar year as compiled monthly based on reports received from loan servicers. As reflected in our Default to Claim Rate assumptions, a significant portion of reported defaults generally do not result in a claim. In certain instances, a defaulted loan may cure, and then re-default in a later period. Consistent with our reserving practice, each new event of default is treated as a unique occurrence and therefore certain loans that cure and re-default may be included as a reported default in multiple periods. Included in this amount for the year ended December 31, 2017 and December 31, 2016 are 8,862 and 3,852 notices, respectively, of new primary defaults related to the FEMA Designated Areas associated with Hurricanes Harvey and Irma.



	Cumulative Paid Claims, Net of Reinsurance
	Year Ended December 31,
(In thousands)
	Unaudited
Default Year	2008		2009		2010		2011		2012		2013		2014		2015		2016		2017
2008	$	189,458	$	740,578	$	1,297,867	$	1,635,069	$	1,744,559	$	1,872,804	$	1,932,283	$	2,022,019	$	2,051,495	$	2,088,124
2009			136,413		619,496		1,236,210		1,471,264		1,711,019		1,807,031		1,921,134		1,958,660		1,986,076
2010					11,810		394,278		700,316		956,598		1,055,935		1,145,497		1,178,546		1,198,031
2011							40,392		323,216		756,820		892,959		982,830		1,016,855		1,038,582
2012									19,200		295,332		528,744		631,982		672,271		692,291
2013											34,504		191,040		307,361		357,087		379,036
2014													13,108		115,852		200,422		233,607
2015															10,479		84,271		142,421
2016																	11,061		76,616
2017																			24,653
																	Total		$	7,859,437
									All outstanding liabilities before 2008, net of reinsurance										15,492
									Liabilities for claims, net of reinsurance (1)										$	485,911

______________________


(1)	Calculated as follows:



(In thousands)
Incurred losses, net of reinsurance	$	8,329,856
Add: All outstanding liabilities before 2008, net of reinsurance	15,492
Less: Cumulative paid claims, net of reinsurance	7,859,437
Liabilities for claims, net of reinsurance	$	485,911

The following table provides a reconciliation of the net incurred losses and paid claims development tables above to the reserve for losses and LAE in the consolidated balance sheet at December 31, 2017:



(In thousands)	December 31, 2017
Net outstanding liabilities - Mortgage Insurance:
Reserve for losses and LAE, net of reinsurance	$	485,911
Reinsurance recoverables on unpaid claims	8,350
Unallocated LAE	13,327
Total gross reserve for losses and LAE	$	507,588

The following is supplementary information about average historical claims duration as of December 31, 2017, representing the average distribution of when claims are paid relative to the year of default:



	Average Annual Percentage Payout of Incurred Losses by Age, Net of Reinsurance (Unaudited)
Years	1	2	3	4	5	6	7	8	9	10
Mortgage Insurance	6.3%	33.9%	31.1%	14.4%	7.5%	4.8%	3.3%	2.6%	1.4%	1.7%