Reinsurance

Effective July 1, 2015, we settled our 2013 quota share reinsurance agreement ("2013 QSR Transaction") by commutation. The settlement included unearned premiums, loss reserves, and profit commission. The commutation resulted in an increase in net premiums written and earned of $69.4 million and $11.6 million, respectively, and a decrease in ceding commissions of $11.6 million in the third quarter of 2015. Receipt of our profit commission of $142.5 million, in addition to other premium and loss amounts, was also completed as part of the settlement.

Effective July 1, 2015, we entered into a quota share reinsurance agreement ("2015 QSR Transaction") with a group of unaffiliated reinsurers that are the same as our 2013 QSR Transaction. Each of the reinsurers has an insurer financial strength rating of A- or better by Standard and Poor’s Rating Services, A.M. Best or both. The 2015 QSR Transaction will provide coverage on policies that were in the 2013 QSR Transaction; additional qualifying in force policies as of the agreement effective date which either had no history of defaults, or where a single default has been cured for twelve or more months at the agreement effective date; and all qualifying new insurance written through December 31, 2016. The agreement will provide coverage on losses incurred on or after the effective date with renewal premium through December 31, 2024, at which time the agreement expires. The 2015 QSR Transaction increases the amount of our insurance in force covered by reinsurance and will result in an increase in the amount of premiums and losses ceded. A higher level of losses ceded will reduce our profit commission and in turn will reduce our premium yield. Early termination of the agreement can be elected by us effective December 31, 2018 for a fee, or under specified scenarios for no fee upon prior written notice. Further, at our sole discretion we may elect to terminate the agreement if we will receive less than 90% of the full credit amount under the private mortgage insurer eligibility requirements ("PMIERs") of Fannie Mae and Freddie Mac (collectively, the "GSEs") for the risk ceded in any required calculation period. The structure of the 2015 QSR Transaction is a 30% quota share for all policies covered, with a 20% ceding commission as well as a profit commission. Generally, under the 2015 QSR Transaction, we will receive a profit commission provided that the loss ratio on the loans covered under the agreement remains below 60%.

A summary of our quota share reinsurance agreements, excluding captive agreements, for 2015, 2014 and 2013 appears below.



	Years ended December 31,
(In thousands)	2015				2014		2013

2013 QSR Transaction
Ceded premiums written, net of profit commission	$	(11,355	)	(1)	$	100,031	$	49,672
Ceded premiums earned, net of profit commission	35,999			(1)	88,528		13,821
Ceded losses incurred	6,060				15,163		176
Ceding commissions (2)	10,235			(1)	37,833		10,408
Profit commission	62,525			(1)	89,133		2,368

2015 QSR Transaction (Effective July 1, 2015)
Ceded premiums written, net of profit commission (3)	$	52,588
Ceded premiums earned, net of profit commission (3)	52,588
Ceded losses incurred	11,424
Ceding commissions (2)	20,582
Profit commission	50,322


(1)	The year ended December 31, 2015 includes the non-recurring impact of commuting our 2013 QSR Transaction. The commutation had no impact on ceded losses incurred.


(2)	Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations.


(3)	As of July 1, 2015, premiums are ceded on an earned and received basis as defined in our 2015 QSR Transaction.

Under the terms of 2015 QSR Transaction, reinsurance premiums, ceding commission and profit commission are settled net on a quarterly basis. The reinsurance premium due after deducting the related ceding commission and profit commission is reported within "Other liabilities" on the consolidated balance sheet as of December 31, 2015. As of December 31, 2014, we had accrued a profit commission receivable of $91.5 million.

In the past, MGIC also obtained captive reinsurance. In a captive reinsurance arrangement, the reinsurer is affiliated with the lender for whom MGIC provides mortgage insurance. As part of our settlement with the Consumer Financial Protection Bureau (“CFPB”) in 2013 and with the Minnesota Department of Commerce in June 2015, discussed in Note 20 – “Litigation and Contingencies” MGIC has agreed to not enter into any new captive reinsurance agreement or reinsure any new loans under any existing captive reinsurance agreement for a period of ten years subsequent to the respective settlements. In accordance with the CFPB settlement, all of our active captive arrangements were placed into run-off. In addition, at the time PMIERs became effective on December 31, 2015, the GSEs will not approve any future reinsurance or risk sharing transaction with a mortgage enterprise or an affiliate of a mortgage enterprise.

Captive agreements were generally written on an annual book of business and each captive reinsurer is required to maintain a separate trust account to support its combined reinsured risk on all annual books. MGIC is the sole beneficiary of the trusts, and the trust accounts are made up of capital deposits by the captive reinsurers, premium deposits by MGIC, and investment income earned. These amounts are held in the trust account and are available to pay reinsured losses. The reinsurance recoverable on loss reserves related to captive agreements was $34 million at December 31, 2015 which was supported by $137 million of trust assets, while at December 31, 2014 the reinsurance recoverable on loss reserves related to captive agreements was $45 million which was supported by $198 million of trust assets.

The effect of all reinsurance agreements on premiums earned and losses incurred is as follows:



	Years ended December 31,
(In thousands)	2015			2014			2013
Premiums earned:
Direct	$	997,892		$	950,973		$	979,078
Assumed	1,178			1,653			2,074
Ceded	(102,848		)	(108,255		)	(38,101		)
Net premiums earned	$	896,222		$	844,371		$	943,051

Losses incurred:
Direct	$	369,680		$	524,051		$	863,871
Assumed	1,552			2,012			2,645
Ceded	(27,685		)	(29,986		)	(27,790		)
Net losses incurred	$	343,547		$	496,077		$	838,726

Generally, reinsurance recoverables on primary loss reserves, paid losses and prepaid reinsurance premiums are supported by trust funds or letters of credit. As such, we have not established an allowance against these recoverables.

See Note 20 – “Litigation and Contingencies” for a discussion of requests or subpoenas for information regarding captive mortgage reinsurance arrangements.