Reinsurance

In our mortgage insurance business, we have used reinsurance as a risk management tool to manage Radian Guaranty’s regulatory Risk-to-capital 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. Premiums are ceded under captive arrangements and the QSR Reinsurance Transactions (and previously were ceded under Smart Home). Included in other assets are prepaid reinsurance premiums of $57.3 million and $60.5 million at December 31, 2014 and 2013, respectively.

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



	Year Ended December 31,
(In thousands)	2014			2013			2012
Net premiums written-insurance:
Direct	$	982,976		$	1,033,323		$	892,650
Assumed	(882		)	(904		)	(903		)
Ceded	(56,913		)	(81,421		)	(85,442		)
Net premiums written-insurance	$	925,181		$	950,998		$	806,305
Net premiums earned-insurance:
Direct	$	905,502		$	848,655		$	743,736
Assumed	43			56			(953		)
Ceded	(61,017		)	(67,291		)	(40,398		)
Net premiums earned-insurance	$	844,528		$	781,420		$	702,385

The following table shows the amounts related to the QSR Reinsurance Transactions for the periods indicated:



	Initial QSR Transaction						Second QSR Transaction
	Year Ended December 31,						Year Ended December 31,
(In thousands)	2014		2013		2012		2014		2013		2012
Ceded premiums written	$	10,217	$	23,047	$	52,151	$	33,751	$	40,225	$	9,648
Ceded premiums earned	17,319		29,746		16,088		29,820		18,356		504
Ceding commissions written	4,862		5,762		13,038		11,813		14,079		3,377

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

Under 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. We have ceded the maximum amount permitted under the Initial QSR Transaction, and therefore, are no longer ceding NIW under this transaction. As of December 31, 2014, RIF ceded under the Initial QSR Transaction declined to $1.1 billion. Radian Guaranty had the ability, at its option, to recapture two-thirds of the reinsurance ceded as part of this transaction on December 31, 2014. However, we chose not to recapture that risk and negotiated an amendment to the transaction pursuant to which we received a $9.2 million profit commission based on experience to date, which increased net premiums earned, and a $15.0 million upfront supplemental ceding commission, which has been deferred and is expected to be amortized as a reduction to our policy acquisition costs over approximately the next five years. Effective January 1, 2015, the ceding commission was reduced from 25% to 20% for two-thirds of the reinsurance ceded under the Initial QSR Transaction.

In the fourth quarter of 2012, Radian Guaranty and the same third-party reinsurance provider entered into the Second QSR Transaction, pursuant to which Radian Guaranty agreed to cede to the third-party reinsurance provider 20% of its NIW beginning with the business written the fourth quarter of 2012. 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.

As of December 31, 2014, we had ceded the maximum of $1.6 billion of RIF as mutually agreed upon under the Second QSR Transaction.

Similar to the Initial QSR Transaction, 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 potentially in exchange for a payment of a profit commission 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 had 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.

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.

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 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 on a cut-off basis will be received over the next few years.

Trust assets related to our captive arrangements are required to be invested in investment grade securities. As of December 31, 2014, 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)	2014		2013
RIF ceded under captive reinsurance arrangements	$	129.8	$	199.8
Ceded losses recoverable related to captives	24.7		45.0

Approximately 43% of our total ceded losses recoverable at December 31, 2014 were related to two captive reinsurers.



	Year Ended December 31,
(In millions)	2014		2013		2012
Ceded premiums written related to captives	$	12.9	$	17.8	$	23.3
Ceded premiums earned related to captives	13.0		17.9		23.4
Ceded recoveries, excluding amounts received upon terminations of captive reinsurance transactions	21.2		47.2		34.7

In 2004, we developed a program, referred to as Smart Home, for reinsuring risk associated with non-prime mortgages. From 2004 through 2007, we entered into four Smart Home transactions. As of May 2013, all of the Smart Home transactions had been terminated.