Reinsurance

The reinsurance agreements we have entered into are discussed below. The effect of all of our reinsurance agreements on premiums earned and losses incurred is as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2017			2016			2017			2016
Premiums earned:
Direct	$	268,709		$	270,718		$	789,317		$	789,671
Assumed	312			152			472			542
Ceded	(31,938		)	(33,494		)	(92,467		)	(100,040		)
Net premiums earned	$	237,083		$	237,376		$	697,322		$	690,173

Losses incurred:
Direct	$	35,313		$	69,579		$	99,122		$	216,874
Assumed	(97		)	241			69			681
Ceded	(5,469		)	(8,923		)	(14,486		)	(25,056		)
Losses incurred, net	$	29,747		$	60,897		$	84,705		$	192,499

Quota share reinsurance

We utilize quota share reinsurance to manage our exposure to losses resulting from our mortgage guaranty insurance policies and to provide reinsurance capital credit under the PMIERs. Our 2017 quota share reinsurance agreement (“2017 QSR Transaction”) provides coverage on new business written January 1, 2017 through December 29, 2017 that meets certain eligibility requirements. Under the agreement we cede losses incurred and premiums on or after the effective date through December 31, 2028, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2021 for a fee, or under specified scenarios for no fee upon prior written notice including if we will receive less than 90% of the full credit amount under the PMIERs for the risk ceded in any required calculation period.

Our 2015 quota share reinsurance agreement (“2015 QSR Transaction”) covers eligible risk in force written before 2017. The 2015 QSR Transaction cedes losses incurred and premiums through December 31, 2024, at which time the agreement expires. 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, including if we will receive less than 90% of the full credit amount under the PMIERs for the risk ceded in any required calculation period.

Each of the reinsurers under our 2015 and 2017 QSR Transactions has an insurer financial strength rating of A- or better by Standard and Poor’s Rating Services, A.M. Best or both. The structure of both the 2017 QSR Transaction and 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 QSR Transactions, we will receive a profit commission provided that the loss ratio on the loans covered under the agreement remains below 60%.

Following is a summary of our quota share reinsurance agreements, excluding captive agreements discussed below, for the three and nine months ended September 30, 2017 and 2016.



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2017		2016		2017		2016
Ceded premiums written and earned, net of profit commission ⁽¹⁾	$	30,880	$	31,707	$	88,692	$	93,334
Ceded losses incurred	5,879		7,432		14,990		22,015
Ceding commissions ⁽²⁾	12,500		12,137		36,751		35,659
Profit commission	31,621		28,981		95,063		84,963


⁽¹⁾	Under our QSR Transactions, premiums are ceded on an earned and received basis as defined in the agreements.


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

Under the terms of QSR Transactions, ceded premiums, ceding commission and profit commission are settled net on a quarterly basis. The ceded premium due after deducting the related ceding commission and profit commission is reported within “Other liabilities” on the consolidated balance sheets.

The reinsurance recoverable on loss reserves related to our QSR Transactions was $35.3 million as of September 30, 2017 and $31.8 million as of December 31, 2016. The reinsurance recoverable balance is secured by funds on deposit from the reinsurers which are based on the funding requirements of PMIERs that address ceded risk.

Captive reinsurance

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 2015, 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, the GSEs will not approve any future reinsurance or risk sharing transaction with a mortgage enterprise or an affiliate of a mortgage enterprise.

The reinsurance recoverable on loss reserves related to captive agreements was $11 million as of September 30, 2017, which was supported by $80 million of trust assets, while as of December 31, 2016, the reinsurance recoverable on loss reserves related to captive agreements was $19 million, which was supported by $91 million of trust assets. Each captive reinsurer is required to maintain a separate trust account to support the risk it has reinsured on all annual books. MGIC is the sole beneficiary of the trusts.