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)	September 30, 2016		December 31, 2015
Reserves for losses by category:
Prime	$	409,438	$	480,481
Alt-A	166,349		203,706
A minus and below	106,678		129,352
IBNR and other (1)	73,057		83,066
LAE	21,255		26,108
Reinsurance recoverable (2)	6,448		8,286
Total primary reserves	783,225		930,999
Pool	36,065		42,084
IBNR and other	823		1,118
LAE	1,112		1,335
Reinsurance recoverable (2)	36		—
Total pool reserves	38,036		44,537
Total First-lien reserves	821,261		975,536
Second-lien and other (3)	673		863
Total reserve for losses	$	821,934	$	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 our Second-lien premium deficiency reserve, for the periods indicated:



	Nine Months Ended September 30,
(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)	152,320			184,490
Prior years	(3,906		)	(42,158		)
Total incurred	148,414			142,332
Deduct: Paid claims and LAE related to:
Current year (2)	2,725			3,417
Prior years	298,352			584,783
Total paid	301,077			588,200
Balance at end of period, net of reinsurance recoverables	815,450			1,087,499
Add: Reinsurance recoverables (1)	6,484			11,071
Balance at end of period	$	821,934		$	1,098,570

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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.

2016 Activity

Our loss reserves at September 30, 2016 declined as compared to December 31, 2015, primarily as a result of the amount of paid claims 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, 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% 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.

Total claims paid decreased for the nine months ended September 30, 2016, compared to the same period in 2015, primarily due to the elevated claim payments associated with the BofA Settlement Agreement (discussed below) in 2015.

2015 Activity

During the first nine 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 period and our related gross Default to Claim Rate assumption applied to those new defaults, which was approximately 14% as of September 30, 2015. In addition, we experienced favorable reserve development on prior year defaults due primarily to a reduction in certain Default to Claim Rate assumptions based on observed trends.

Claims paid for the nine months ended September 30, 2015 include $236.6 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 for our primary loans (net of Claim Denials and Rescissions) used in estimating our primary reserve for losses was 45% (41% excluding pending claims) at September 30, 2016, and 46% (42% excluding pending claims) at December 31, 2015. During the nine months ended September 30, 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%. As of September 30, 2016, our gross Default to Claim Rates on our primary portfolio ranged from approximately 12% for new defaults, up to approximately 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 in the most recent nine months. 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 (discussed below) on the volume of future Rescissions and Claim Denials.

Loss Mitigation

Rescissions and Claim Denials continue to reduce our paid losses and have resulted in a reduction in our loss reserve, although our estimates of future Rescissions and Claim Denials have generally been declining. 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. Our estimate of net future Rescissions and Claim Denials reduced our loss reserve as of September 30, 2016 and December 31, 2015 by approximately $59 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 our estimated rate of Rescissions and Claim Denials on future claims, 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.

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 $16.8 million and $26.6 million at September 30, 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. In addition, except for certain limited circumstances, Radian Guaranty also agreed that with respect to Future Legacy Loans 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 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 September 30, 2016 and December 31, 2015, Radian Guaranty had $75.8 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. In accordance with these provisions, Radian Guaranty withdrew $11.7 million from this account in October 2016 related to Loss Mitigation Activity that had become final as of August 31, 2016. Following this withdrawal, 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 $64 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 September 30, 2016, we have $57 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.