Radian Group Inc.unit Radian Guaranty Inc.said April 12 that it entered into a quota share reinsurance agreement for single-premiummortgage insurance business with a panel of third-party reinsurance providers.
Fannie Maeand Freddie Mac approvedthe quota share reinsurance agreement and allowed full credit under the privatemortgage insurer eligibility requirements for the risk ceded under the agreement.
Effective Jan. 1, the agreement covers the following single-premiumbusiness, subject to certain conditions: 20% of existing performing policies writtenbetween Jan. 1, 2012, and March 31, 2013; 35% of existing performing policies writtenbetween April 1, 2013, and Dec. 31, 2015; and 35% of new insurance written betweenJan. 1 and Dec. 31, 2017.
Radian will receive a 25% ceding commission for ceded premiumsrelated to the transaction, as well as a profit commission provided that the lossratio on the loans covered under the agreement generally remains below 55%. Forrisk ceded under the quota share reinsurance agreement, the after-tax implied costof capital over the term of the transaction is expected to be less than 2%.
The quota share reinsurance agreement is expected to improvethe company's return on capital, significantly improve its PMIERs position, andbetter position the company to redeem its $325 million surplus note as early asJune 30. Redemption of the surplus note is subject to approval by the PennsylvaniaInsurance Department. The redemption of the surplus note is expected to increaseholding company liquidity by the corresponding amount of the redemption.
In the first quarter, the quota share reinsurance agreement isexpected to decrease the percentage of Radian's single-premium risk in force, netof reinsurance ceded, from 31% to 25%. The agreement is expected to have a negligibleimpact on operating earnings per share, including the following for the first quarter:a decrease to net premiums earned of approximately $6 million, net of accrued profitcommission; a decrease to operating expenses of approximately $3 million, relatedto the ceding commission; a decrease to provision for losses and amortization ofdeferred acquisition costs of approximately $600,000; and a net decrease to pretaxincome from continuing operations and to adjusted pretax operating income of approximately$2.4 million.
Radian maintains the right to discontinue ceding new insurancewritten under the agreement at the end of any calendar quarter. The scheduled terminationof the contract is Dec. 31, 2027, but Radian reserves the right to terminate theagreement as of Jan. 1, 2020, or at the end of any calendar quarter after such date,based on certain conditions and subject to a termination fee.