Reinsurance

In our mortgage insurance business, we have used reinsurance as a risk management tool to manage Radian Guaranty’s regulatory risk-to-capital ratio and to comply with certain state requirements that limit the amount of risk a mortgage insurer may retain on a single loan to 25% of the total loan amount. See Note 14 for information regarding statutory capital requirements for our insurance subsidiaries. We have primarily used reinsurance in our financial guaranty business to the extent necessary to comply with applicable single risk limits. Historically, our financial guaranty business has ceded an immaterial amount of its directly insured portfolio. However, in January 2012, as part of the Assured Transaction (discussed below), we ceded $1.8 billion of our financial guaranty direct public finance risk to Assured as a means of reducing our net par outstanding. As of December 31, 2013, approximately $1.1 billion of this ceded net par remains outstanding. Included in other assets are unearned premiums on risk that we have ceded of $74.7 million and $64.5 million at December 31, 2013 and 2012, respectively.

The effect of reinsurance on net premiums written and earned is as follows:



	Year Ended December 31,
(In thousands)	2013			2012			2011
Net premiums written-insurance:
Direct	$	1,033,421		$	892,983		$	755,758
Assumed	(11,183		)	(88,991		)	(11,162		)
Ceded	(81,421		)	(117,362		)	(37,349		)
Net premiums written-insurance	$	940,817		$	686,630		$	707,247
Net premiums earned-insurance:
Direct	$	890,487		$	796,253		$	762,428
Assumed	12,508			(3,571		)	32,337
Ceded	(72,101		)	(53,700		)	(38,740		)
Net premiums earned-insurance	$	830,894		$	738,982		$	756,025

Financial Guaranty

In January 2013, pursuant to the FGIC Commutation, we commuted $822.2 million of financial guaranty net par outstanding that Financial Guaranty Insurance Company (“FGIC”) had ceded to us. This transaction reduced our net premiums written by $12.6 million and reduced our net premiums earned by $2.5 million in the first quarter of 2013.

In January 2012, Radian Asset Assurance entered into a transaction (the “Assured Transaction”) with subsidiaries of Assured Guaranty Ltd. (collectively “Assured”) that included the commutation of $13.8 billion of financial guaranty net par outstanding that Radian Asset Assurance had reinsured from Assured, and the cession of $1.8 billion of direct public finance business to Assured. As part of this transaction, we entered into an administrative services agreement with Assured for surveillance, risk management, claims administration and claims payment services in connection with the policies ceded. This transaction reduced our net premiums written by $119.8 million and reduced our net premiums earned by $22.2 million in the first quarter of 2012.

Mortgage Insurance

During the second quarter of 2012, Radian Guaranty entered into a quota share reinsurance (“QSR”) agreement with a third-party reinsurance provider (the “Initial QSR Transaction”). Through the Initial QSR Transaction, Radian Guaranty agreed to cede to the third-party reinsurance provider 20% of its NIW beginning with the business written in the fourth quarter of 2011 up to $1.6 billion of ceded RIF. As of December 31, 2013, RIF ceded under the Initial QSR Transaction was $1.3 billion. Radian Guaranty has the ability, at its option, to recapture two-thirds of the reinsurance ceded as part of this transaction on December 31, 2014, which would result in Radian Guaranty reassuming the related RIF in exchange for a payment of a predefined commutation amount from the reinsurer. We ceded that maximum amount permitted under the Initial QSR Transaction, and therefore, are no longer ceding NIW under this transaction.

The following table shows the amounts related to the Initial QSR Transaction for the periods indicated:



	Year Ended December 31,
(In thousands)	2013		2012
Ceded premiums written	$	23,047	$	52,151
Ceded premiums earned	29,746		16,088
Ceding commissions written	5,762		13,038

In the fourth quarter of 2012, Radian Guaranty and the same third-party reinsurance provider entered into a second QSR agreement (the “Second QSR Transaction” and together with the Initial QSR Transaction, the “Reinsurance Transactions”). The limitation on ceded risk in this second transaction was $750 million initially and the parties have the ability to mutually increase the amount of ceded risk up to a maximum of $2 billion. As of December 31, 2013, RIF ceded under the Second QSR Transaction was $1.3 billion. The Second QSR Transaction also provides that, effective as of December 31, 2015, Radian Guaranty will have the ability, at its option (the “Commutation Option”), to recapture one-half of the reinsurance ceded with respect to conventional GSE loans, which would result in Radian Guaranty reassuming the related RIF in exchange for a payment of a predefined commutation amount from the reinsurer. Pursuant to the original terms of the Second QSR Transaction:


(i)	Radian Guaranty agreed to cede to the reinsurer 20% of all premiums and losses incurred with respect to conventional GSE loans and will initially receive a 35% ceding commission; provided, that if we do not exercise our Commutation Option, the ceding commission will be reduced to 30% for the portion of the ceded RIF that was subject to the Commutation Option; and


(ii)	Radian Guaranty has the ability to cede 100% of all premiums and losses incurred with respect to non-conventional portfolio loans and will receive a 25% ceding commission. We have not ceded any risk on non-conventional portfolio loans.

Effective April 1, 2013, Radian Guaranty amended the original terms of the Second QSR Transaction to reduce the percentage of all premiums and losses incurred on new business ceded to the reinsurer under this reinsurance agreement on a prospective basis from 20% to 5% with respect to NIW on conventional GSE loans.

The following table shows the amounts related to the Second QSR Transaction for the periods indicated:



	Year Ended December 31,
(In thousands)	2013		2012
Ceded premiums written	$	40,225	$	9,648
Ceded premiums earned	18,356		504
Ceding commissions written	14,079		3,377

Ceded losses to date under the Reinsurance Transactions have been immaterial.

We and other companies in the mortgage insurance industry have participated in reinsurance arrangements with mortgage lenders commonly referred to as “captive reinsurance arrangements.” Under captive reinsurance arrangements, a mortgage lender typically established a reinsurance company that assumed part of the risk associated with the portfolio of that lender’s mortgages insured by us on a flow basis (as compared to mortgages insured in structured transactions, which typically are not eligible for captive reinsurance arrangements). In return for the reinsurance company’s assumption of a portion of the risk, we ceded a portion of the mortgage insurance premiums paid to us to the reinsurance company. The captive reinsurers are typically required to maintain minimum capitalization equal to 10% of the risk assumed. We have also participated, on a limited basis, in “quota share” captive reinsurance agreements under which the captive reinsurance company assumed a pro rata share of all losses in return for a pro rata share of the premiums collected.

In most cases, the risk assumed by the reinsurance company was an excess layer of aggregate losses that would be penetrated only in a situation of adverse loss development. During the financial crisis and downturn in the housing and related credit markets in which losses have increased significantly, most all captive reinsurance arrangements have attached, requiring our captive reinsurers to make payments to us. In all cases, the captive reinsurer established a trust to secure our potential cash recoveries. We generally are the sole beneficiary under these trusts, and therefore, have the ability to initiate disbursements under the trusts in accordance with the terms of our captive reinsurance agreements. All of our existing captive reinsurance arrangements are operating on a run-off basis, meaning that no new business is being placed in these captives.

In 2004, we developed a program referred to as Smart Home, for reinsuring risk associated with non-prime mortgages. These reinsurance transactions, through the use of VIE structures, effectively transferred risk from our portfolio to investors in the capital markets. From 2004 through 2007, we entered into four Smart Home transactions. As of December 31, 2012, we had terminated three of these transactions. The final Smart Home transaction matured in May 2013.

As of December 31, 2013, we have received total cash reinsurance recoveries (including recoveries from terminations) from Smart Home and captive reinsurance arrangements of approximately $886.6 million since inception of these programs, with most of these recoveries coming from captive reinsurance arrangements. In some instances, we anticipate that the ultimate losses ceded to the captive reinsurers will be greater than the assets currently held by the segregated trusts established for each captive reinsurer. Recorded recoverables, however, are limited to the current trust balances. We expect that most of the actual cash recoveries from those captives that have not yet been terminated will be received over the next few years.

The reinsurance recoverable amounts on paid losses are considered to be financing receivables in accordance with the accounting standard regarding accounts receivable, which includes disclosure requirements regarding the credit quality of financing receivables and the allowance for credit losses. We do not record an allowance for credit losses on reinsurance recoverables, as the reinsurance recoverable amounts for both paid and unpaid losses are fully collateralized in the segregated trusts. Therefore, credit exposure is limited to the credit quality of investments held by the trust. Trust assets related to our captive arrangements are required to be invested in investment grade securities. As of December 31, 2013, the trust assets for these trust accounts consisted primarily of cash equivalents, money market investments and investment grade securities.

The following tables present information related to our captive transactions for the periods indicated:



	Year Ended December 31,
(In millions)	2013		2012
RIF ceded under captive reinsurance arrangements	$	199.8	$	275.0
Ceded losses recoverable related to captives	45.0		82.2

Approximately 42.8% of our total ceded losses recoverable at December 31, 2013 were related to two captive reinsurers.



	Year Ended December 31,
(In millions)	2013		2012		2011
Ceded premiums written related to captives	$	17.8	$	23.3	$	28.6
Ceded premiums earned related to captives	17.9		23.4		28.8
Ceded recoveries, excluding amounts received upon terminations of captive reinsurance transactions	47.2		34.7		84.5