Losses and Loss Adjustment Expense

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



(In thousands)	March 31, 2015		December 31, 2014
Reserves for losses by category:
Prime	$	640,919	$	700,174
Alt-A	278,350		292,293
A minus and below	163,390		179,103
IBNR and other	167,204		223,114
LAE	53,210		56,164
Reinsurance recoverable (1)	13,365		26,665
Total primary reserves	1,316,438		1,477,513
Pool	62,943		75,785
IBNR and other	1,227		1,775
LAE	3,051		3,542
Total pool reserves	67,221		81,102
Total First-lien reserves	1,383,659		1,558,615
Second-lien and other (2)	1,055		1,417
Total reserve for losses	$	1,384,714	$	1,560,032

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


(2)	Does not include our Second-lien PDR that is included in other liabilities.

The following table presents information relating to our mortgage insurance reserves for losses, including IBNR reserves and LAE but excluding Second-lien PDR, for the periods indicated:



	Three Months Ended March 31,
(In thousands)	2015			2014
Mortgage Insurance
Balance at beginning of period	$	1,560,032		$	2,164,353
Less reinsurance recoverables (1)	26,665			38,363
Balance at beginning of period, net of reinsurance recoverables	1,533,367			2,125,990
Add losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2)	80,437			108,849			(3)
Prior years	(35,360		)	(59,689		)	(3)
Total incurred	45,077			49,160
Deduct paid claims and LAE related to:
Current year (2)	—			—
Prior years	207,095			306,941
Total paid	207,095			306,941
Balance at end of period, net of reinsurance recoverables	1,371,349			1,868,209
Add reinsurance recoverables (1)	13,365			25,751
Balance at end of period	$	1,384,714		$	1,893,960

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

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 three months ended March 31, 2014, 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 $33.8 million, with an equal and offsetting adjustment to the amount previously reported for default notices reported and unreported in prior years. For the years ended December 31, 2014, 2013 and 2012, the amounts previously reported related to losses and LAE incurred from current year default notices should have been lower by approximately $71.8 million, $65.0 million and $75.7 million, respectively, with equal and offsetting adjustments to the incurred loss amounts related to prior years’ default notices.

Our mortgage insurance loss reserves declined for the three months ended March 31, 2015, primarily as a result of the aggregate volume of paid claims, Cures, Rescissions and Claim Denials exceeding 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 2015. The impact to incurred losses from default notices reported in the first quarter of 2015 was partially mitigated by favorable reserve development on prior year defaults, which was driven primarily by a reduction in certain Default to Claim Rate assumptions, as well as by higher Cures than were previously estimated. We experienced similar favorable development related to incurred losses from prior year defaults during the first three months of 2014. Our results for the three months ended March 31, 2015 also include the impact of the BofA Settlement Agreement, as described below.

Total paid claims decreased for the three months ended March 31, 2015 compared to the comparable period in 2014, primarily due to the overall decline in defaulted loans and the ongoing reduction in pending claims. Claims paid for the three months ended March 31, 2015 include $98.5 million related to the implementation of the BofA Settlement Agreement.

Our aggregate weighted average Default to Claim Rate assumption (net of Claim Denials and Rescissions) used in estimating our primary reserve for losses has remained relatively stable at 53% (47% excluding pending claims) at March 31, 2015, compared to 52% at December 31, 2014. The change in our Default to Claim Rate resulted from an increase in Cures of defaults with lower Default to Claim Rates, which resulted in an increase in remaining defaults having higher Default to Claim Rates. We develop our Default to Claim Rate estimates on defaulted loans based on models that use a variety of loan characteristics to determine the likelihood that a default will reach claim status. 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, as measured by the progress toward foreclosure sale and the number of months in default. During the three months ended March 31, 2015, we reduced our gross Default to Claim Rate assumption for new primary defaults from 16% to 15% due to continued improvement in actual claim development trends. As of March 31, 2015, our gross Default to Claim Rates on our primary portfolio ranged from 15% for new defaults, to 65% for 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 over the past year, with consideration 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.

The following table illustrates the amount of First-lien claims submitted to us for payment that were rescinded or denied, for the periods indicated, net of any reinstatements of previous Rescissions or Claim Denials within each period. Net (reinstatements), Rescissions or Claim Denials related to the BofA Settlement Agreement prior to the February 1, 2015 Implementation Date represent such activities on loans that subsequently became subject to the BofA Settlement Agreement.



	Three Months Ended March 31,
(In millions)	2015			2014
Rescissions	$	3.8		$	6.4
Claim Denials	5.6			18.9
Net (reinstatements), Rescissions or Claim Denials related to the BofA Settlement Agreement	(24.1		)	3.0
Net First-lien claims submitted for payment that were (reinstated), rescinded or denied (1)	$	(14.7	)	$	28.3

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(1)	Includes an amount related to a small number of submitted claims that were subsequently withdrawn by the insured.

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 reserves. Our estimate of net future Rescissions and Claim Denials reduced our loss reserves as of March 31, 2015 and December 31, 2014 by approximately $115 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 March 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 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 was $108.6 million and $163.6 million at March 31, 2015 and December 31, 2014, respectively. As of March 31, 2015, the IBNR reserve estimate of $108.6 million included approximately $85.2 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 March 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 March 31, 2015 included an estimate of future reinstatements of previous Claim Denials, Rescissions and Claim Curtailments of $13.6 million, $0.8 million, and $3.4 million, respectively. These reserves relate to $85.5 million of claims that were denied within the preceding 12 months, $79.8 million of policies rescinded within the preceding 24 months, and $44.4 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 Rescission activity. Our accrued liability for such refunds, which is included within other liabilities on our condensed consolidated balance sheets, was $7.2 million and $9.0 million as of March 31, 2015 and December 31, 2014, respectively.

BofA Settlement Agreement

On September 16, 2014, Radian Guaranty entered into a Confidential Settlement Agreement and Release (the “BofA Settlement Agreement”) with Countrywide Home Loans, Inc. and Bank of America, N.A. (together, the “Insureds”), as a successor to BofA Home Loan Servicing f/k/a Countrywide Home Loans Servicing LP, 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 on that date. Approximately 12% of the Subject Loans are neither held in portfolio by the Insureds nor owned by the GSEs, and require 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. While we can provide no assurance whether one or more of the other investors will consent to have their Subject Loans included in the settlement, for purposes of the reserve established for the BofA Settlement Agreement we have assumed that these investors will provide consent. The contractual deadline for such consent has been extended to June 1, 2015. To the extent that one or more of the other investors do not consent to the settlement, the associated Loss Mitigation Activities would not be reinstated under the terms of the BofA Settlement Agreement and the portion of the reserve related to such non-consenting investors would be reversed. See Note 10 of Notes to Consolidated Financial Statements in our 2014 Form 10-K for additional information about the BofA Settlement Agreement.