Reinsurance

In our mortgage insurance business, we have used reinsurance as a risk management tool to manage Radian Guaranty’s regulatory Risk-to-capital. Premiums are ceded under captive arrangements and the QSR Transactions. Included in other assets are prepaid reinsurance premiums of $40.5 million and $57.3 million at December 31, 2015 and 2014, respectively.

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



	Year Ended December 31,
(In thousands)	2015			2014			2013
Net premiums written-insurance:
Direct	$	1,009,409		$	982,976		$	1,033,323
Assumed	104			(882		)	(904		)
Ceded	(41,008		)	(56,913		)	(81,421		)
Net premiums written-insurance	$	968,505		$	925,181		$	950,998
Net premiums earned-insurance:
Direct	$	973,645		$	905,502		$	848,655
Assumed	43			43			56
Ceded	(57,780		)	(61,017		)	(67,291		)
Net premiums earned-insurance	$	915,908		$	844,528		$	781,420

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



	Initial QSR Transaction						Second QSR Transaction
	Year Ended December 31,						Year Ended December 31,
(In thousands)	2015		2014		2013		2015		2014		2013
Ceded premiums written	$	14,471	$	10,217	$	23,047	$	15,742	$	33,751	$	40,225
Ceded premiums earned	22,157		17,319		29,746		24,818		29,820		18,356
Ceding commissions written	3,134		4,862		5,762		8,309		11,813		14,079

Ceded losses to date under the QSR 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. As of December 31, 2015, RIF ceded under the Initial QSR Transaction declined to $0.8 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 through December 31, 2014, which increased net premiums earned, and a $15.0 million upfront supplemental ceding commission, which has been deferred and is being amortized as a reduction to our policy acquisition costs over approximately five years beginning January 1, 2015. In addition, pursuant to the original agreement and effective January 1, 2015, the ceding commission was reduced from 25% to 20% for two-thirds of the remaining 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 in 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. As of December 31, 2015, RIF ceded under the Second QSR Transaction declined to $1.3 billion.

Similar to the Initial QSR Transaction, pursuant to the Second QSR Transaction Radian Guaranty had the ability, at its option, to recapture one-half of the reinsurance ceded with respect to conventional GSE loans as of December 31, 2015. Radian Guaranty chose not to recapture that risk and negotiated an amendment to the Second QSR Transaction pursuant to which we received a profit commission of approximately $8.0 million based on performance to date, which increased net premiums earned during 2015. In addition, pursuant to the amendment, Radian Guaranty received an $8.5 million prepaid supplemental ceding commission, the recognition of which has been deferred and is expected to be amortized as a reduction to our other operating expenses over approximately five years. Finally, pursuant to the original agreement and effective January 1, 2016, the ceding commission was reduced from 35% to 30% for one-half of the remaining reinsurance ceded under the Second QSR Transaction.

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, losses increased significantly and almost all captive reinsurance arrangements have attached, thereby 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. We have not entered into any new captives since 2007 and, pursuant to consent orders with the CFPB and with the order with the Minnesota Department of Commerce, we have agreed not to enter into any new captives until 2025. See Note 17 regarding our Consent Order with the Minnesota Department of Commerce.

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.

Trust assets related to our captive arrangements are required to be invested in investment grade securities. As of December 31, 2015, 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 thousands)	2015	2014
RIF ceded under captive reinsurance arrangements	71,359	129,795
Ceded losses recoverable related to captives	7,293	24,711



	Year Ended December 31,
(In thousands)	2015	2014	2013
Ceded premiums written related to captives	9,950	12,948	17,812
Ceded premiums earned related to captives	9,959	12,958	17,853
Ceded recoveries, excluding amounts received upon terminations of captive reinsurance transactions	20,950	21,213	47,151