Historically, our ratings were critical to our ability to market our products and to maintain our competitive position and  customer confidence in our products. In addition, in order to maintain the highest level of eligibility with the GSEs, mortgage  insurers historically had to maintain an insurance financial strength rating of  AA- or Aa3 from at least two of the three rating  agencies by which they are customarily rated.  Although Radian Guaranty’s ratings are substantially below those required  ratings, the GSEs have allowed Radian Guaranty to operate under business and financial remediation plans and retain its  eligibility status. We believe that since the economic downturn, the GSEs have not been as concerned with ratings as they have  been in past periods; however, we expect that they will renew their focus on ratings as markets improve, in which case  maintaining our ratings at or above specified levels may once again become critical to maintain our eligibility status with the  GSEs. In addition, to the extent that there is a future restructuring of the U.S. housing finance system, we believe that ratings  may once again become a more critical factor in our ability to ef fectively participate in any such new system.  Because we do not establish reserves in our mortgage insurance business until a borrower has failed to make two monthly  payments, our financial statements do not reflect our ultimate expected obligation for losses on our entire portfolio of  insured mortgages.  We do not establish reserves in our mortgage insurance business until we are notified that a borrower has failed to make at  least two monthly payments when due. Because our mortgage insurance reserving does not account for the impact of future  losses that we expect to incur with respect to performing (non-defaulted) loans, our obligation for ultimate losses that we expect  to incur at any period end is not reflected in our financial statements, except to the extent that a premium deficiency exists.  As a  result, future losses beyond what we have recorded in our financial statements may have a material impact on future results as  defaults occur. We establish loss reserves in both our mortgage insurance and financial guaranty businesses to provide for the estimated  cost of future claims. Because our reserves represent only our best estimate of claims to be paid in the future, these reserves  may be insufficient to satisfy the full amount of claims that we ultimately have to pay . Setting our loss reserves requires  significant judgment by management with respect to the likelihood, magnitude and timing of each potential loss.  The models,  assumptions and estimates we use to establish loss reserves may not prove to be accurate, especially during an extended  economic downturn or a period of extreme market volatility and uncertainty , as has existed since 2007. Many of the programs and initiatives that have been implemented to prevent or forestall foreclosures in our mortgage  insurance business have resulted in fewer defaulted loans moving to claim, and consequently , an increase in the aging of our  inventory of defaulted loans.  As a result, the number of our defaulted loans that have been in default for 240 or more days,  which represents our most aged category of defaulted loans, currently represents a significantly lar ger portion of our default  inventory than has historically been the case. While these loans are generally assigned a higher loss reserve based on our belief  that they are more likely to result in a claim, we also assume, based on historical trends, that a significant portion of these loans  will cure or otherwise not result in a claim. Given current market conditions, the limited number of cures we are currently  seeing among this inventory of loans, and the significant period of time that these loans have been in default, it is possible that  the ultimate cure rate for these defaulted loans will be significantly less than historical rates, and therefore, less than our current  estimates of cures for this inventory of defaults. Further , the foreclosure moratoriums and other delays that have been imposed  in response to allegations that certain mortgage servicers and other parties acted improperly in foreclosure proceedings is likely  resulting in further aging of our defaulted loan portfolio, which has decreased claim payments (perhaps only temporarily) and  created additional uncertainty regarding the likelihood, magnitude and timing of anticipated losses. If our estimates are  inadequate, we may be required to increase our reserves, which could have a material adverse ef fect on our financial condition,  capital position and operating results, as well as our ability to continue to write new business. In addition to establishing mortgage insurance loss reserves for defaulted loans, under GAAP , we are required to establish  a premium deficiency reserve, or PDR, for our mortgage insurance products if the amount by which the net present value of  expected future losses for a particular product and the expenses for such product exceeds the net present value of expected  future premiums and existing reserves for such product.  We evaluate whether a premium deficiency exists at the end of each  fiscal quarter. As of December 31, 2012, a premium deficiency reserve of approximately  $3.7 million existed for our second- lien insurance business. Our evaluation of premium deficiency is based on our best estimate for future losses, expenses and  premiums. This evaluation depends upon many significant assumptions, including assumptions regarding future  macroeconomic conditions, and therefore, is inherently uncertain and may prove to be inaccurate.  Although no premium  deficiency existed on our first-lien insurance business at  December 31, 2012, there can be no assurance that premium  deficiency reserves will not be required for this product or our other mortgage insurance products in future periods. 75 If the estimates we use in establishing loss reserves are incorrect, we may be required to take unexpected charges to income,  which could adversely affect our capital position.