Reinsurance

In our mortgage insurance business, from time to time we use reinsurance as a strategy to manage our capital position and risk profile, including, among other things, managing Radian Guaranty’s regulatory Risk-to-capital and compliance with the PMIERs financial requirements. Premiums are ceded under the QSR Transactions, the 2016 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)	2017			2016			2015
Net premiums written—insurance:
Direct	$	1,032,735		$	1,000,111		$	1,009,409
Assumed	25			29			104
Ceded (1)	(214,343		)	(266,306		)	(41,008		)
Net premiums written—insurance	$	818,417		$	733,834		$	968,505
Net premiums earned—insurance:
Direct	$	990,016		$	999,093		$	973,645
Assumed	28			35			43
Ceded (1)	(57,271		)	(77,359		)	(57,780		)
Net premiums earned—insurance	$	932,773		$	921,769		$	915,908

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(1)	Net of profit commission.

QSR Transactions

In 2012, Radian Guaranty entered into the QSR Transactions with a third-party reinsurance provider. Radian Guaranty has ceded the maximum amount permitted under the QSR Transactions; therefore, Radian Guaranty is no longer ceding NIW under these transactions. RIF ceded under the QSR Transactions was $1.2 billion, $1.6 billion and $2.1 billion as of December 31, 2017, 2016 and 2015, respectively.

2016 Single Premium 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 2016 Single Premium QSR Transaction with a panel of third-party reinsurers. Under the 2016 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.

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.

Effective December 31, 2017, we amended the 2016 Single Premium QSR Transaction to increase the amount of ceded risk on performing loans under the agreement from 35% to 65% for the 2015 through 2017 vintages. As of the effective date, the result of this amendment increases the amount of risk ceded on Single Premium Policies, including for the purposes of calculating any future ceding commissions and profit commissions that Radian Guaranty will earn. It will also increase the future amounts of our ceded premiums and ceded losses. RIF ceded under the 2016 Single Premium QSR Transaction was $6.9 billion and $3.8 billion as of December 31, 2017 and 2016, respectively.

Ceded Premiums, Commissions and Losses

The following tables show the amounts related to the QSR Transactions and the 2016 Single Premium QSR Transaction for the periods indicated:



	QSR Transactions						2016 Single Premium QSR Transaction
	Year Ended December 31,						Year Ended December 31,
(In thousands)	2017		2016		2015		2017		2016		2015
Ceded premiums written (1)	$	19,356	$	28,097	$	30,213	$	193,517	$	233,206	$	—
Ceded premiums earned (1)	28,503		42,515		46,975		27,284		29,808		—
Ceding commissions written	5,536		8,019		11,443		55,333		66,153		—
Ceding commissions earned (2)	13,122		16,573		14,453		13,774		15,303		—
Ceded losses, net	771		1,858		1,187		2,490		2,262		—

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(1)	Net of profit commission.


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

2018 Single Premium QSR Transaction

In October 2017, we entered into the 2018 Single Premium QSR Transaction with a panel of third-party reinsurers. Under the 2018 Single Premium QSR Transaction, beginning with the business written in January 2018, we expect to cede 65% of our Single Premium NIW, subject to certain conditions and a limitation on ceded premiums written equal to $335 million for policies issued between January 1, 2018 and December 31, 2019. Notwithstanding this limitation, the parties may mutually agree to increase the amount of ceded risk above this level.

Radian Guaranty will receive a 25% ceding commission for premiums ceded pursuant to this transaction. Radian Guaranty will also receive an annual profit commission based on the performance of the loans subject to the agreement, provided that the loss ratio on the subject loans is below 56% for that calendar year. Radian Guaranty may discontinue ceding new policies under the agreement at the end of any calendar quarter.

The agreement is scheduled to terminate on December 31, 2029. However, Radian Guaranty may terminate this agreement prior to the scheduled date if one or both of the GSEs no longer grant full credit for the reinsurance. Radian Guaranty also has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of January 1, 2022, or at the end of any calendar quarter thereafter. Termination of the agreement 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.

Captive Reinsurance Arrangements

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 $0.3 million at December 31, 2017, compared to $0.4 million as of December 31, 2016.

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. During 2017, our RIF ceded under captive reinsurance arrangements declined to $9.9 million as of December 31, 2017, compared to $12.7 million as of December 31, 2016, as we terminated several captive reinsurance arrangements during the year.

Collateral

Although we use reinsurance as one of our risk management tools, 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 2016 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 2016 Single Premium QSR Transaction are expected to be realized from this account.