Note 7 - Reinsurance

9 Months Ended

Sep. 30, 2012

7. Reinsurance [Abstract]

Reinsurance [Text Block]

Reinsurance

In our mortgage insurance business, we use reinsurance as a risk management tool to reduce our net risk and strengthen our regulatory risk-to-capital ratio. We have primarily used reinsurance in our financial guaranty business to the extent necessary in specific transactions to comply with applicable single risk limits. Although the use of reinsurance does not discharge an insurer from its primary liability to the insured, the reinsuring company assumes the related liability under these arrangements. Included in other assets are unearned premiums on risk that we have ceded of $54.1 million and $0.8 million at September 30, 2012 and December 31, 2011, respectively.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2012			2011			2012			2011
Net premiums written-insurance:
Direct	$	232,086		$	187,726		$	650,188		$	552,575
Assumed	(918		)	(251		)	(89,434		)	(10,415		)
Ceded	(21,891		)	(9,188		)	(91,867		)	(28,346		)
Net premiums written-insurance	$	209,277		$	178,287		$	468,887		$	513,814
Net premiums earned-insurance:
Direct	$	201,988		$	183,028		$	590,016		$	574,126
Assumed	3,408			6,130			(5,573		)	26,824
Ceded	(14,433		)	(9,503		)	(39,336		)	(29,338		)
Net premiums earned-insurance	$	190,963		$	179,655		$	545,107		$	571,612

During the second quarter of 2012, Radian Guaranty entered into the Initial Quota Share Reinsurance Transaction. Through the Initial Quota Share Reinsurance Transaction, Radian Guaranty agreed to cede 20% of its new insurance written beginning with the business written in the fourth quarter of 2011. As of September 30, 2012, the amount ceded pursuant to this transaction was $1.4 billion of Radian Guaranty’s RIF. The amount of risk that ultimately may be ceded is limited to $1.6 billion. At a 25 to 1 risk-to-capital ratio, the equivalent initial capital benefit associated with ceding this amount of risk will be $62.5 million. Radian Guaranty has the ability, at its option, to commute two-thirds of the reinsurance ceded as part of this transaction on December 31, 2014, which would result in Radian Guaranty reassuming the related RIF in exchange for a predefined commutation amount.

Under the Initial Quota Share Reinsurance Transaction, for the three and nine months ended September 30, 2012, ceded premiums written were $16.4 million and $41.9 million, respectively, and ceded premiums earned were $5.3 million and $8.4 million, respectively. Ceding commissions under this transaction for the three and nine months ended September 30, 2012 were $4.1 million and $10.5 million, respectively.

In the fourth quarter of 2012, Radian Guaranty and the same third-party reinsurance provider agreed to the terms of the Second Quota Share Reinsurance Transaction that provide for incremental reinsurance for Radian Guaranty’s new insurance written, as further described below. This agreement, which is subject to final documentation and Freddie Mac approval, is expected to be effective in the fourth quarter of 2012. The limitation on ceded risk is expected to be $750 million initially, and the parties have the ability to mutually increase the amount of ceded risk up to a maximum of $2 billion. The agreed upon terms also provide that, effective as of December 31, 2015, Radian Guaranty will have the ability, at its option (the “Commutation Option”), to commute one-half of the reinsurance ceded with respect to conventional GSE loans, which would result in Radian Guaranty reassuming the related risk in force in exchange for a predefined commutation amount. Pursuant to the agreed upon terms:

(i) Radian Guaranty will cede to the reinsurer 20% of all premiums and losses incurred with respect to conventional GSE loans and will initially receive a 35% ceding commission; provided, that if we do not exercise our Commutation Option, the ceding commission will be reduced to 30% for the portion of the ceded risk in force that was subject to the Commutation Option; and

(ii) Radian Guaranty will have the ability to cede 100% of all premiums and losses incurred with respect to non-conventional, portfolio loans and will receive a 25% ceding commission. We do not expect the volume of portfolio loans to be material.

In the second quarter of 2012, we terminated one of our remaining reinsurance transactions under our Smart Home program that was scheduled to mature in November 2012. The early termination did not have a material impact on our financial or risk-to-capital position, statutory capital, results of operations or cash flows. The final remaining Smart Home transaction is scheduled to mature in June 2013.

See Note 1 for the impact of the Assured Transaction, executed in the quarter ended March 31, 2012, on net premiums written and earned.