Note 7 - Reinsurance

3 Months Ended

Mar. 31, 2020

In our mortgage insurance and title insurance businesses, we use reinsurance as part of our risk distribution strategy, including to manage our capital position and risk profile. The reinsurance arrangements for our mortgage insurance business include premiums ceded under the QSR Program, the Single Premium QSR Program and the Excess-of-Loss Program. The amount of credit that we receive under the PMIERs financial requirements for our third-party reinsurance transactions is subject to ongoing review and approval by the GSEs.

The effect of all of our reinsurance programs on our net income is as follows:



	Three Months Ended March 31,
(In thousands)	2020			2019
Net premiums written—insurance:
Direct	$	279,482		$	261,031
Assumed (1)	3,451			2,445
Ceded (2)	(19,543		)	(10,156		)
Net premiums written—insurance	$	263,390		$	253,320

Net premiums earned—insurance:
Direct	$	301,254		$	280,223
Assumed (1)	3,456			2,450
Ceded (2)	(27,295		)	(19,161		)
Net premiums earned—insurance	$	277,415		$	263,512

Ceding commissions earned (3)	$	9,966		$	8,685
Ceded losses	1,962			1,687

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(1)	Includes premiums earned from our participation in certain credit risk transfer programs.


(2)	Net of profit commission.


(3)	Deferred ceding commissions of $71.6 million and $88.1 million are included in other liabilities on our condensed consolidated balance sheets at March 31, 2020 and 2019, respectively.

Single Premium QSR Program

Radian Guaranty entered into each of the 2016 Single Premium QSR Agreement, 2018 Singles Premium QSR Agreement and 2020 Single Premium QSR Agreement with panels of third-party reinsurers to cede a contractual quota share percent of our Single Premium NIW as of the effective date of each agreement (as set forth in the table below), subject to certain conditions. Radian Guaranty receives a ceding commission for ceded premiums written pursuant to these transactions. Radian Guaranty

also receives a profit commission, provided that the loss ratio on the loans covered under the agreement generally remains below the applicable prescribed thresholds. Losses on the ceded risk above this level reduce Radian Guaranty’s profit commission on a dollar-for-dollar basis.

Each of the agreements is subject to a scheduled termination date as set forth in the table below; however, Radian Guaranty has the option, based on certain conditions and subject to a termination fee, to terminate any of the agreements at the end of any calendar quarter on or after the applicable optional termination date. If Radian Guaranty exercises this option in the future, it would result in Radian Guaranty reassuming the related RIF in exchange for a net payment to the reinsurer calculated in accordance with the terms of the applicable agreement. Radian Guaranty also may terminate any of the agreements prior to the applicable scheduled termination date under certain circumstances/conditions, including if one or both of the GSEs no longer grant full PMIERs credit for the reinsurance.

The 2020 Single Premium QSR Agreement is the only QSR agreement under which Radian Guaranty is currently ceding NIW. Under the 2020 Single Premium QSR Agreement, NIW for policies issued between January 1, 2020 and December 31, 2021 is being ceded, subject to certain conditions and a limitation on ceded premiums written of $250 million. The parties may mutually agree to increase the amount of ceded risk above this level.

The following table sets forth additional details regarding the Single Premium QSR Program:



(In millions)	2016 Singles QSR			2018 Singles QSR		2020 Singles QSR
Policy In-force Dates	Jan 1, 2012-Dec 31, 2017			Jan 1, 2018-Dec 31, 2019		Jan 1, 2020-Dec 31, 2021
Effective Date	January 1, 2016			January 1, 2018		January 1, 2020
Scheduled Termination Date	December 31, 2027			December 31, 2029		December 31, 2031
Optional Termination Date	January 1, 2020			January 1, 2022		January 1, 2024
Quota Share %	20% - 65%		(1)	65%		65%
Ceding Commission %	25%			25%		25%
Profit Commission %	Up to 55%			Up to 56%		Up to 56%

	As of March 31, 2020
RIF Ceded	$	5,080		$	3,066	$	435

	As of December 31, 2019
RIF Ceded	$	5,351		$	3,231	$	—

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(1)

Effective December 31, 2017, we amended the 2016 Single Premium QSR Agreement to increase the amount of ceded risk on performing loans under the agreement from 35% to 65% for the 2015 through 2017 vintages. Loans included in the 2012 through 2014 vintages, and any other loans subject to the agreement that were delinquent at the time of the amendment, were unaffected by the change and therefore the amount of ceded risk for those loans continues to range from 20% to 35%.

Excess-of-Loss Program

Through March 31, 2020, Radian Guaranty has entered into three fully collateralized reinsurance arrangements with the Eagle Re Issuers. For the respective coverage periods, Radian Guaranty retains the first-loss layer of aggregate losses, as well as any losses in excess of the outstanding reinsurance coverage amounts. The Eagle Re Issuers provide second layer coverage up to the outstanding coverage amounts. For each of these three reinsurance arrangements, the Eagle Re Issuers financed their coverage by issuing mortgage insurance-linked notes to eligible third-party capital markets investors in unregistered private offerings. The aggregate excess-of-loss reinsurance coverage for these transactions decreases over a 10-year period as the principal balances of the underlying covered mortgages decrease and as any claims are paid by the applicable Eagle Re Issuer or the mortgage insurance is canceled. The outstanding reinsurance coverage amount will begin amortizing after an initial period in which a target level of credit enhancement is obtained and will stop amortizing if certain thresholds are reached, such as if the reinsured mortgages were to experience an elevated level of delinquencies or certain credit enhancement tests were not maintained. Radian Guaranty has rights to terminate the reinsurance agreements upon the occurrence of certain events.

The following table sets forth additional details regarding the Excess-of-Loss Program:



(In millions)	Eagle Re 2020-1		Eagle Re 2019-1		Eagle Re 2018-1
Issued	February 2020		April 2019		November 2018
Policy In-force Dates	Jan 1, 2019-Sep 30, 2019		Jan 1, 2018-Dec 31, 2018		Jan 1, 2017-Dec 31, 2017
Initial RIF	$	9,866	$	10,705	$	9,109
Initial Coverage	488		562		434		(1)
First Layer Retention	202		268		205

	As of March 31, 2020
RIF	$	9,200	$	7,679	$	6,482
Remaining Coverage	488		421		299		(1)
First Layer Retention	202		267		203

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(1)	Excludes a separate excess-of-loss reinsurance agreement entered into by Radian Guaranty that initially provided up to $21.4 million of coverage.

The Eagle Re Issuers are not subsidiaries or affiliates of Radian Guaranty. Based on the accounting guidance that addresses VIEs, we have not consolidated any of the Eagle Re Issuers in our consolidated financial statements, because Radian does not have: (i) the power to direct the activities that most significantly affect the Eagle Re Issuers’ economic performances or (ii) the obligation to absorb losses or the right to receive benefits from the Eagle Re Issuers that potentially could be significant to the Eagle Re Issuers. See Note 2 of Notes to Consolidated Financial Statements in our 2019 Form 10-K for more information on our accounting treatment of VIEs.

The reinsurance premium due to the Eagle Re Issuers is calculated by multiplying the outstanding reinsurance coverage amount at the beginning of a period by a coupon rate, which is the sum of one-month LIBOR plus a contractual risk margin, and then subtracting actual investment income collected on the assets in the reinsurance trust during the preceding month. As a result, the premiums we pay will vary based on: (i) the spread between LIBOR and the rates on the investments held by the reinsurance trust and (ii) the outstanding amount of reinsurance coverage. As the reinsurance premium will vary based on changes in these rates, we concluded that the reinsurance agreements contain embedded derivatives, which we have accounted for separately as freestanding derivatives and recorded in other assets or other liabilities on our condensed consolidated balance sheets.

See Note 2 of Notes to Consolidated Financial Statements in our 2019 Form 10-K for more information on our fair value measurements of financial instruments.

In the event an Eagle Re Issuer is unable to meet its future obligations to us, if any, our insurance subsidiaries would be liable to make claims payments to our policyholders. In the event that all of the assets in the reinsurance trust (consisting of U.S. government money market funds, cash or U.S. Treasury securities) have become worthless and the Eagle Re Issuer is unable to make its payments to us, our maximum potential loss would be the amount of mortgage insurance claim payments for losses on the insured policies, net of the aggregate reinsurance payments already received, up to the full aggregate excess-of-loss reinsurance coverage amount. In the same scenario, the related embedded derivative would no longer have value. See Note 4 for additional information on our embedded derivatives.

The Eagle Re Issuers represent our only VIEs as of March 31, 2020 and December 31, 2019. The following table presents the total assets and liabilities of the Eagle Re Issuers as of the dates indicated.



	Total VIE Assets and Liabilities (1)
(In thousands)	March 31, 2020		December 31, 2019
Eagle Re 2020-1	$	488,385	$	—
Eagle Re 2019-1	421,367		508,449
Eagle Re 2018-1	298,817		357,005
Total	$	1,208,569	$	865,454

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(1)	Assets held by the Eagle Re Issuers are required to be invested in U.S. government money market funds, cash or U.S. Treasury securities. Liabilities of the Eagle Re Issuers consist of their mortgage insurance-linked notes, described above.

Other 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, consistent with the PMIERs reinsurer counterparty collateral requirements, Radian Guaranty’s reinsurers have established trusts to help secure our potential cash recoveries. In addition to the total VIE assets of the Eagle Re Issuers discussed above, the amount held in other reinsurance trusts was $221.8 million as of March 31, 2020, compared to $203.2 million as of December 31, 2019. In addition, for the Single Premium QSR Program, Radian Guaranty holds amounts related to ceded premiums written to collateralize the reinsurers’ obligations, which is reported in reinsurance funds withheld on our condensed consolidated balance sheets. Any loss recoveries and profit commissions paid to Radian Guaranty related to the Single Premium QSR Program are expected to be realized from this account.

See Note 8 of Notes to Consolidated Financial Statements in our 2019 Form 10-K for more information about our reinsurance transactions.