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)	2016		2015
Reserves for losses by category:
Prime	$	379,845	$	480,481
Alt-A	148,006		203,706
A minus and below	101,653		129,352
IBNR and other (1)	71,107		83,066
LAE	18,630		26,108
Reinsurance recoverable (2)	6,816		8,286
Total primary reserves	726,057		930,999
Pool	31,853		42,084
IBNR and other	673		1,118
LAE	932		1,335
Reinsurance recoverable (2)	35		—
Total pool reserves	33,493		44,537
Total first-lien reserves	759,550		975,536
Second-lien and other (3)	719		863
Total reserve for losses	$	760,269	$	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 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 PDR:



	Year Ended December 31,
(In thousands)	2016			2015			2014
Balance at January 1,	$	976,399		$	1,560,032		$	2,164,353
Less: reinsurance recoverables (1)	8,286			26,665			38,363
Balance at January 1, net of reinsurance recoverables	968,113			1,533,367			2,125,990
Add losses and LAE incurred in respect of default notices reported and unreported in:
Current year (2)	206,383			229,061			351,184
Prior years	(3,516		)	(29,647		)	(105,545		)
Total incurred	202,867			199,414			245,639
Deduct paid claims and LAE related to:
Current year (2)	11,410			10,837			13,562
Prior years	406,152			753,831			824,700
Total paid	417,562			764,668			838,262
Balance at end of period, net of reinsurance recoverables	753,418			968,113			1,533,367
Add: reinsurance recoverables (1)	6,851			8,286			26,665
Balance at December 31,	$	760,269		$	976,399		$	1,560,032

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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 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.

Reserve Activity

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. Total incurred losses for 2015 decreased by $46.2 million as compared to 2014. This decrease was driven primarily by a continued decline in the number of new current year defaults and a decrease in the Default to Claim Rate assumptions applied to such defaults. 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. This favorable impact to current year defaults was partially offset by a decline in the favorable reserve development from prior year defaults, which, although still positive, provided less of a benefit to our provision for losses in 2015 as compared to 2014. 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.

Total paid claims decreased for 2015 as compared to 2014 primarily due to the overall decline in defaulted loans and ongoing reduction in pending claims.

2014 Activity

Our loss reserve declined in 2014 from December 31, 2013, primarily as a result of the volume of paid claims, Cures and Rescissions and Claim Denials having exceeded new default notices received. Total incurred losses during 2014 primarily were the result of new default notices during 2014. The impact to incurred losses from default notices reported in 2014 was partially mitigated by favorable reserve development on prior year defaults, which was driven primarily by higher Cures and lower Claim Severity rates than were previously estimated. Our results of 2014 also include the impact of the BofA Settlement Agreement, as described below.

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 42% (40% excluding pending claims) at December 31, 2016 compared to 46% (42% excluding pending claims) at December 31, 2015. The change in our Default to Claim Rate in 2016 resulted primarily from a decrease in the proportion of pending claims, which have higher Default to Claim Rates, and a decrease in the assumed gross Default to Claim Rate for new defaults from 13% to 12%, as of December 31, 2016 as well as a decrease in our estimated claim rate on aged defaults not in Foreclosure Stage. As of December 31, 2016, our gross Default to Claim Rates on our primary portfolio ranged from 12% for new defaults, to 62% for other defaults not in Foreclosure Stage, and 81% for Foreclosure Stage Defaults. As of December 31, 2015, these gross Default to Claim Rates ranged from 13% for new defaults, to 65% 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, as well as the estimated impact of the BofA Settlement Agreement, as described below.

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, 2016 and 2015 by approximately $39 million and $53 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. Our 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, 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 $14.3 million and $26.6 million at December 31, 2016 and 2015, 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, 2016 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 101.0% of risk exposure at December 31, 2016), we estimated that our loss reserves would change by approximately $6.3 million at December 31, 2016. 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 42% at December 31, 2016, including our assumptions related to Rescissions and Claim Denials), we estimated a $14.5 million change in our loss reserves at December 31, 2016.

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 effectively completed by December 31, 2015.

The BofA Settlement Agreement provides that all claims decisions by Radian Guaranty on Legacy Loans covered by the agreement (including claims paid, coverage Rescissions, Claim Denials and Claim Curtailments) that were communicated on or before February 13, 2013 will become final and will not be subject to future challenge or adjustment. With respect to a group of loans referred to as Future Legacy Loans, the BofA Settlement Agreement provides that, subject to certain limited exceptions and conditions, Radian Guaranty will limit Rescissions, Claim Denials or Claim Curtailments on these loans. To the extent any such Loss Mitigation Activities previously have been taken on Future Legacy Loans, Radian Guaranty agreed to reinstate coverage and pay a reimbursement amount equal to the difference between the amount actually paid by Radian Guaranty and the eligible claim amount. Radian Guaranty further 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; provided however, that Radian Guaranty retains the right to curtail Legacy Loans that were less than 90 days delinquent as of July 31, 2014 (“Potential Claim Curtailment Loans”) and any Future Legacy Loans serviced by a servicer other than the Insureds (a “Protected Claim Curtailment”).

The BofA Settlement Agreement further provides that for certain loans referred to as Servicing Only Loans: (i) if Radian Guaranty effected a claim payment on or before May 30, 2014, any Claim Curtailments on such loans will become final and will not be subject to future challenge, appeal or adjustment and (ii) for claim payments for Servicing Only Loans paid after May 30, 2014, Radian Guaranty will not make any Claim Curtailments (excluding Protected Claim Curtailments, which may continue in the ordinary course) and, to the extent any Claim Curtailments previously have been effected on such loans, Radian Guaranty will pay a reimbursement amount equal to the Claim Curtailment amount. The BofA Settlement Agreement does not affect Radian Guaranty’s right to effect Rescissions or Claim Denials on any Servicing Only Loans and any such Rescissions or Claim Denials will continue to be governed by the applicable Master Policies, subject to certain requirements in the BofA Settlement Agreement regarding the documents required to perfect such claims. Radian Guaranty further agreed not to assert any right to cancel coverage on any Subject Loan for failure to initiate certain proceedings (most commonly foreclosure proceedings) within the timelines set forth in the applicable Master Policies.

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 and 2015, Radian Guaranty had $63.9 million and $74.7 million, respectively, in the 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 December 31, 2016, we have $57.4 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.

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 2016 is presented as supplementary information.



	Incurred Losses, Net of Reinsurance
	Year Ended December 31,																				As of December 31, 2016
($ in thousands)																					Total of IBNR Liabilities Plus Expected Development on Reported Claims (1)		Cumulative Number of Reported Defaults (2)
	Unaudited
Default Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
2007	$	1,119,529	$	1,211,075	$	1,051,097	$	1,126,173	$	1,131,490	$	1,135,617	$	1,179,600	$	1,174,723	$	1,175,919	$	1,178,745	$	46,136	152,336
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		13,021		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		1,896		213,836
2010							1,102,856		1,215,136		1,192,482		1,195,056		1,207,774		1,220,289		1,218,264		858		146,324
2011									1,058,625		1,152,016		1,052,277		1,050,555		1,062,579		1,061,161		881		118,972
2012											803,831		763,969		711,213		720,502		715,646		858		89,845
2013													505,732		405,334		401,444		404,333		936		71,749
2014															337,784		247,074		265,891		1,304		58,215
2015																	222,555		198,186		2,277		49,825
2016																			201,016		3,540		46,264
																	Total		$	9,377,232

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(1)	Represents reserves as of December 31, 2016 related to IBNR liabilities and expected development on claims paid related to the Freddie Mac Agreement. As described above, we paid an initial claim amount related to that agreement in 2013.

(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 subsequently 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.



	Cumulative Paid Claims, Net of Reinsurance
	Year Ended December 31,
(In thousands)
	Unaudited
Default Year	2007		2008		2009		2010		2011		2012		2013		2014		2015		2016
2007	$	100,435	$	649,961	$	860,777	$	995,161	$	1,055,536	$	1,076,665	$	1,098,686	$	1,111,468	$	1,130,932	$	1,140,053
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
2009					136,413		619,496		1,236,210		1,471,264		1,711,019		1,807,031		1,921,134		1,958,660
2010							11,810		394,278		700,316		956,598		1,055,935		1,145,497		1,178,546
2011									40,392		323,216		756,820		892,959		982,830		1,016,855
2012											19,200		295,332		528,744		631,982		672,271
2013													34,504		191,040		307,361		357,087
2014															13,108		115,852		200,422
2015																	10,479		84,271
2016																			11,061
																	Total		$	8,670,721
									All outstanding liabilities before 2007, net of reinsurance										27,327
					Liabilities for claims, net of reinsurance (1)														$	733,838

______________________


(1)	Calculated as follows:



(In thousands)
Incurred losses, net of reinsurance	$	9,377,232
Add: All outstanding liabilities before 2007, net of reinsurance	27,327
Less: Cumulative paid claims, net of reinsurance	8,670,721
Liabilities for claims, net of reinsurance	$	733,838

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, 2016:



(In thousands)	December 31, 2016
Net outstanding liabilities - Mortgage Insurance:
Reserve for losses and LAE, net of reinsurance	$	733,838
Reinsurance recoverables on unpaid claims	6,851
Unallocated LAE	19,580
Total gross reserve for losses and LAE	$	760,269

The following is supplementary information about average historical claims duration as of December 31, 2016, 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	5.6%	34.2%	29.2%	14.2%	7.4%	4.6%	3.3%	2.4%	1.5%	0.8%