Mortgage insurer Radian Guaranty (RDN) signed a quota-share reinsurance agreement with an outside provider designed to protect the company’s risk-to-capital position by shielding it from some of the insurance risks tied to mortgages.
The provider of the reinsurance was not disclosed in the company’s report.
However, having a reinsurance deal in place assists the insurer as it tries to achieve capital flexibility at a time when liquidity concerns are a top concern for many mortgage insurers.
The Philadelphia-based firm said it wrote $6.5 billion in new business during the first quarter of 2012 and watched delinquencies on insured loans fall from 107,230 delinquent loans at the beginning of March to 103,027 delinquencies by month’s end.
Still, the main highlight of the firm’s Tuesday update is the reinsurance contract, which essentially allows Radian to cede 20% of its new insurance written in the fourth quarter of 2011, or approximately $532 million of its entire risk in force.
Radian said additional risks can be ceded through the agreement, but it tops out in the range of $1.25 billion to $1.6 billion.
Reinsurance contracts allow insurers to spread risk through deals with other insurers that agree to backstop some of the risk on insurance contracts.
“At a 25-to-1 risk-to-capital ratio, the equivalent capital benefit associated with ceding this amount of risk would be between $50 million and $62.5 million. Radian has the ability, at its option, to commute two-thirds of the reinsurance on December 31, 2014,” the insurer said in a press statement.
To preserve Radian’s risk-to-capital ratio, the firm’s CEO S.A. Ibrahim said the insurer has pursued a combination of internal reinsurance, commutations and investment strategies.
