11.	Reinsurance

MGIC has obtained both captive and non-captive reinsurance in the past. In a captive reinsurance arrangement, the reinsurer is affiliated with the lender for whom MGIC provides mortgage insurance.

Since June 2005, various state and federal regulators have conducted investigations or requested information regarding captive mortgage reinsurance arrangements in which we participated, in part, in order to consider review with the Real Estate Settlement Procedures Act (“RESPA”). In April 2013, the U.S. District Court of the Southern District of Florida approved a settlement between MGIC and the Consumer Financial Protection Bureau (“CFPB”) that resolved federal investigation of MGIC’s participation in captive reinsurance arrangements in the mortgage insurance industry. The settlement concludes the investigation with respect to MGIC without the CFPB or the court making any findings of wrongdoing. Three other mortgage insurers agreed to similar settlements. As part of the settlements, MGIC and the three other mortgage insurers agreed that they would 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. In accordance with this settlement, all of our active captive arrangements have been placed into run-off.

Captive agreements were written on an annual book of business and the captives are required to maintain a separate trust account to support the combined reinsured risk on all annual books. MGIC is the sole beneficiary of the trust, and the trust account is made up of capital deposits by the lender captive, 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 $64 million at December 31, 2013 which was supported by $226 million of trust assets, while at December 31, 2012 the reinsurance recoverable on loss reserves related to captives was $104 million which was supported by $303 million of trust assets. At December 31, 2013 and December 31, 2012 there was an additional $23 million and $25 million, respectively, of trust assets in captive agreements where there was no related reinsurance recoverable on loss reserves. Trust fund assets of $3.0 million and $6.3 million were transferred to us as a result of captive terminations during 2013 and 2012, respectively.

In April 2013, we entered into a quota share reinsurance agreement with a group of unaffiliated reinsurers that are not captive reinsurers. These reinsurers primarily have a rating of A or better by Moody’s Investors Service, Standard & Poor’s Rating Services or both. This reinsurance agreement applies to new insurance written between April 1, 2013 and December 31, 2015 (with certain exclusions) and covers incurred losses, with renewal premium through December 31, 2018. Early termination is possible under specified scenarios. The structure of the reinsurance agreement is a 30% quota share, with a 20% ceding commission as well as a profit commission. Recoverables under the agreement are supported by trust funds or letters of credit. In December 2013, we entered into an Addendum to the quota share reinsurance agreement that applies to certain insurance written before April 1, 2013 that has never been delinquent. The structure of the quota share reinsurance agreement remains the same, with the exception that the business written before April 1, 2013 has a 40% quota share. Under the Addendum, policies for which premium was received but unearned as of December 31, 2013 were ceded, which generated “Prepaid reinsurance premiums” of $23.9 million at December 31, 2013. A summary of the combined quota share reinsurance agreement for 2013 appears below.

	2013
	(In thousands)

Ceded premiums written, net of profit commission	$	49,672

Ceded premiums earned, net of profit commission		13,821

Ceded losses incurred		176

Ceding commissions		10,408

The effect of all risk sharing arrangements on premiums earned and losses incurred is as follows:

	2013			2012			2011
	(In thousands)
Premiums earned:
Direct	$	979,078		$	1,065,663		$	1,170,868
Assumed		2,074			2,425			3,891
Ceded		(38,101	)		(34,918	)		(50,924	)

Net premiums earned	$	943,051		$	1,033,170		$	1,123,835

Losses incurred:
Direct	$	863,871		$	2,115,974		$	1,775,122
Assumed		2,645			6,912			5,229
Ceded		(27,790	)		(55,633	)		(65,644	)

Net losses incurred	$	838,726		$	2,067,253		$	1,714,707

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.