Reinsurance

In our mortgage insurance business, we have used reinsurance as a capital and risk management tool to, among other things, manage Radian Guaranty’s regulatory Risk-to-capital and compliance with the PMIERs Financial Requirements. Premiums are ceded under the QSR Transactions, the Single Premium QSR Transaction and captive arrangements.

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



	Year Ended December 31,
(In thousands)	2016			2015			2014
Net premiums written—insurance:
Direct	$	1,000,111		$	1,009,409		$	982,976
Assumed	29			104			(882		)
Ceded (1)	(266,306		)	(41,008		)	(56,913		)
Net premiums written—insurance	$	733,834		$	968,505		$	925,181
Net premiums earned—insurance:
Direct	$	999,093		$	973,645		$	905,502
Assumed	35			43			43
Ceded (1)	(77,359		)	(57,780		)	(61,017		)
Net premiums earned—insurance	$	921,769		$	915,908		$	844,528

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(1)	Net of profit commission.

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, 2016, RIF ceded under the Initial QSR Transaction declined to $0.6 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, the recognition of 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 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, 2015, we had ceded the maximum of $1.6 billion of RIF under the Second QSR Transaction. As of December 31, 2016, RIF ceded under the Second QSR Transaction declined to $1.0 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 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 $8.3 million based on performance through December 31, 2015, 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. 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.

In the first quarter of 2016, in order to proactively manage the risk and return profile of Radian Guaranty’s insured portfolio and continue managing its position under the PMIERs Financial Requirements in a cost-effective manner, Radian Guaranty entered into the Single Premium QSR Transaction with a panel of third-party reinsurers. Under the Single Premium QSR Transaction, effective January 1, 2016, Radian Guaranty began ceding the following Single Premium IIF and NIW, subject to certain conditions:


•	20% of its existing performing Single Premium Policies written between January 1, 2012 and March 31, 2013;


•	35% of its existing performing Single Premium Policies written between April 1, 2013 and December 31, 2015; and


•	35% of its Single Premium NIW from January 1, 2016 to December 31, 2017, subject to a limitation on ceded premiums written equal to $195 million for policies issued between January 1, 2016 and December 31, 2017.

Radian Guaranty receives a 25% ceding commission for premiums ceded pursuant to this transaction. Radian Guaranty also receives a profit commission, provided that the loss ratio on the loans covered under the agreement generally remains below 55%. Losses on the ceded risk above this level reduce Radian Guaranty’s profit commission on a dollar-for-dollar basis.

Notwithstanding the limitation on ceded premiums for Single Premium NIW written between January 1, 2016 and December 31, 2017, the parties may mutually agree to increase the amount of ceded risk on December 31, 2017. Radian Guaranty is entitled to discontinue ceding new policies under the agreement at the end of any calendar quarter. The agreement is scheduled to terminate on December 31, 2027; however, Radian Guaranty has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of January 1, 2020, or at the end of any calendar quarter thereafter, which would result in Radian Guaranty reassuming the related RIF in exchange for a net payment from the reinsurer calculated in accordance with the terms of the agreement. RIF ceded under the Single Premium QSR Transaction was $3.8 billion as of December 31, 2016.

The following tables show the amounts related to the QSR Transactions and the Single Premium QSR Transaction for the periods indicated:



	QSR Transactions						Single Premium QSR Transaction
	Year Ended December 31,						Year Ended December 31,
(In thousands)	2016		2015		2014		2016		2015		2014
Ceded premiums written (1)	$	28,097	$	30,213	$	43,968	$	233,206	$	—	$	—
Ceded premiums earned (1)	42,515		46,975		47,139		29,808		—		—
Ceding commissions written	8,019		11,443		16,675		66,153		—		—
Ceding commissions earned (2)	16,573		14,453		13,275		15,303		—		—
Ceded losses	1,858		1,187		2,165		2,262		—		—

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(1)	Net of profit commission.


(2)	Includes amounts reported in policy acquisition costs and other operating expenses.

In the past, we and other companies in the mortgage insurance industry also 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. 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.

During the financial crisis, losses increased significantly and almost all captive reinsurance arrangements attached, thereby requiring our captive reinsurers to make payments to us. The reinsurance recoverable on loss reserves related to captive agreements was $0.4 million at December 31, 2016, compared to $7.3 million as of December 31, 2015.

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 the Minnesota Department of Commerce, we have agreed not to enter into any new captives until 2025. See Note 13 regarding our Consent Order with the Minnesota Department of Commerce. During 2016, our RIF ceded under captive reinsurance arrangements declined to $12.7 million as of December 31, 2016, compared to $71.4 million as of December 31, 2015, as we terminated a significant number of captive reinsurance arrangements during the year.

Although we use reinsurance as a risk management tool, reinsurance does not relieve us of our obligations to our policyholders. In the event the reinsurers are unable to meet their obligations to us, our insurance subsidiaries would be liable for any defaulted amounts. However, in all of our reinsurance transactions, the reinsurers have established a trust to help secure our potential cash recoveries. In addition, for the Single Premium QSR Transaction, Radian Guaranty holds amounts received from ceded premiums written to collateralize the reinsurers’ obligations, which is reported in reinsurance funds withheld on the consolidated balance sheets. Any loss recoveries and profit commissions to Radian Guaranty related to the Single Premium QSR Transaction are expected to be realized from this account.