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Reinsurance | 12 Months Ended
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Dec. 31, 2016
Reinsurance Disclosures [Abstract] |
Reinsurance | Reinsurance Our consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with the related earned premiums) we have underwritten to other insurance companies who agree to share these risks. The primary purpose of ceded reinsurance is to protect us, at a cost, against a fixed percentage of losses arising from policies covered by the agreement; however we also utilize reinsurance to manage our capital requirements under PMIERs. Reinsurance is currently placed on a quota-share basis, but we also have captive reinsurance agreements that remain in effect. The reinsurance agreements we have entered into are discussed below. The effect of all reinsurance agreements on premiums earned and losses incurred, which is reflected in the consolidated statements of operations, is as follows:
|  | Years ended December 31,
(In thousands) |  | 2016 |  | 2015 |  | 2014
Premiums earned: |  |  |  |  |  |
Direct |  | $ | 1,058,545 |  |  | $ | 997,892 |  |  | $ | 950,973 |
Assumed |  | 662 |  |  | 1,178 |  |  | 1,653 |
Ceded |  | (133,981 | ) |  | (102,848 | ) |  | (108,255 | )
Net premiums earned |  | $ | 925,226 |  |  | $ | 896,222 |  |  | $ | 844,371 |
Losses incurred: |  |  |  |  |  |
Direct |  | $ | 273,207 |  |  | $ | 369,680 |  |  | $ | 524,051 |
Assumed |  | 1,138 |  |  | 1,552 |  |  | 2,012 |
Ceded |  | (34,188 | ) |  | (27,685 | ) |  | (29,986 | )
Net losses incurred |  | $ | 240,157 |  |  | $ | 343,547 |  |  | $ | 496,077 |
Quota share reinsurance 2015 QSR Transaction We utilize a quota-share reinsurance agreement with a group of unaffiliated reinsurers, each with an insurer financial strength rating of A- or better by Standard and Poor's Rating Services, A.M. Best, or both, to manage our exposure to losses resulting from our mortgage guaranty policies and to provide reinsurance capital credit under the PMIERs. Our 2015 quota share reinsurance agreement("2015 QSR Transaction"), which became effective July 1, 2015 provides coverage on policies that were in the 2013 quota share reinsurance agreement ("2013 QSR Transaction"); additional qualifying in force policies as of the agreement effective date which either had no history of defaults, or where a single default had been cured for twelve or more months at the agreement effective date; and all qualifying new insurance written through December 31, 2016. The agreement cedes losses incurred and premiums on or after the effective date through December 31, 2024, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2018 for a fee, or under specified scenarios for no fee upon prior written notice, including if we will receive less than 90% of the full credit amount under the PMIERs for the risk ceded in any required calculation period. The 2015 QSR Transaction increased the amount of our IIF covered by reinsurance and will increase the amount of premiums and losses ceded. A higher level of losses ceded will reduce our profit commission. The structure of the 2015 QSR Transaction is a 30% quota share for all policies covered, with a 20% ceding commission as well as a profit commission. Generally, under the 2015 QSR Transaction, we will receive a profit commission provided that the loss ratio on the loans covered under the agreement remains below 60%. 2013 QSR Transaction Effective July 1, 2015, we settled our 2013 QSR Transaction by commutation. The settlement included unearned premiums, loss reserves, and profit commission. The commutation resulted in an increase in net premiums written and earned of $69.4 million and $11.6 million, respectively, and a decrease in ceding commissions of $11.6 million in the third quarter of 2015. Receipt of our profit commission of $142.5 million, in addition to other premium and loss amounts, was also completed as part of the settlement. 2017 QSR Transaction We have agreed to terms on a quota-share reinsurance agreement for 2017 ("2017 QSR Transaction") with a group of unaffiliated reinsurers, each with an insurer financial strength rating of A- or better by Standard and Poor's, A.M. Best or both, to manage our exposure to losses resulting from our mortgage guaranty policies and to provide reinsurance capital credit under the PMIERs. The GSEs have approved the terms of our proposed 2017 QSR Transaction. The 2017 QSR Transaction is expected to be executed during the first quarter of 2017 with an effective date retroactive to January 1, 2017, and will provide coverage on new business written January 1, 2017 through December 29, 2017 that meets certain eligibility requirements. Under the agreed upon terms, the 2017 QSR Transaction will cede losses incurred and premiums on or after the effective date through December 31, 2028, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2021 for a fee, or under specified scenarios for no fee upon prior written notice, including if we will receive less than 90% of the full credit amount under the PMIERs for the risk ceded in any required calculation period. The agreed upon structure of the 2017 QSR Transaction is a 30% quota share for all policies covered, with a 20% ceding commission as well as a profit commission. Generally, under the 2017 QSR Transaction, we will receive a profit commission provided that the loss ratio on the loans covered under the agreement remains below 60%. Following is a summary of our quota share reinsurance agreements, excluding captive agreements, for 2016, 2015 and 2014.
|  | Years ended December 31,
(In thousands) |  | 2016 |  | 2015 |  | 2014
2015 QSR Transaction (Effective July 1, 2015) |  |  |  |  |  |
Ceded premiums written, net of profit commission (1) |  | $ | 125,460 |  |  | $ | 52,588 |  |  | n/a |
Ceded premiums earned, net of profit commission (1) |  | 125,460 |  |  | 52,588 |  |  | n/a |
Ceded losses incurred |  | 30,201 |  |  | 11,424 |  |  | n/a |
Ceding commissions (2) |  | 47,629 |  |  | 20,582 |  |  | n/a |
Profit commission |  | 112,685 |  |  | 50,322 |  |  | n/a |
2013 QSR Transaction |  |  |  |  |  |
Ceded premiums written, net of profit commission |  | n/a |  |  | $ | (11,355 | ) | (3) | $ | 100,031 |
Ceded premiums earned, net of profit commission |  | n/a |  |  | 35,999 |  | (3) | 88,528 |
Ceded losses incurred |  | n/a |  |  | 6,060 |  |  | 15,163 |
Ceding commissions (2) |  | n/a |  |  | 10,235 |  | (3) | 37,833 |
Profit commission |  | n/a |  |  | 62,525 |  | (3) | 89,133 |
(1) | As of July 1, 2015, premiums are ceded on an earned and received basis as defined in our 2015 QSR Transaction.
(2) | Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations.
(3) | The year ended December 31, 2015 includes the non-recurring impact of commuting our 2013 QSR Transaction. The commutation had no impact on ceded losses incurred.
Under the terms of 2015 QSR Transaction, reinsurance premiums, ceding commission and profit commission are settled net on a quarterly basis. The reinsurance premium due after deducting the related ceding commission and profit commission is reported within "Other liabilities" on the consolidated balance sheets. The reinsurance recoverable on loss reserves related to our 2015 QSR Transaction was $31.8 million as of December 31, 2016 and $10.9 million as of December 31, 2015. The reinsurance recoverable balance is secured by funds on deposit from the reinsurers which are based on the funding requirements of PMIERs that address ceded risk. Captive reinsurance In the past, MGIC also obtained captive reinsurance. In a captive reinsurance arrangement, the reinsurer is affiliated with the lender for whom MGIC provides mortgage insurance. As part of our settlement with the CFPB in 2013 and with the Minnesota Department of Commerce in 2015, MGIC has agreed to not enter into any new captive reinsurance agreement or reinsure any new loans under any existing captive reinsurance agreement for a period of ten years subsequent to the respective settlements. In accordance with the CFPB settlement, all of our active captive arrangements were placed into run-off. In addition, the GSEs will not approve any future reinsurance or risk sharing transaction with a mortgage enterprise or an affiliate of a mortgage enterprise. The reinsurance recoverable on loss reserves related to captive agreements was $19 million at December 31, 2016 which was supported by $91 million of trust assets, while at December 31, 2015 the reinsurance recoverable on loss reserves related to captive agreements was $34 million which was supported by $137 million of trust assets. Each captive reinsurer is required to maintain a separate trust account to support its combined reinsured risk on all annual books. MGIC is the sole beneficiary of the trusts.

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