Radian acts to increase capital cushion at MI unit

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Radian Group has improved the capital cushion at its mortgage insurance subsidiary through enhanced reinsurance arrangements and providing cash and marketable securities.

The need to increase the capital levels under the Primary Mortgage Insurer Eligibility Requirements were driven by increased delinquencies in hurricane-affected states.

"Given that the PMIERs require Radian to maintain significantly more minimum required assets for delinquent loans than for performing loans, the company's minimum required assets from FEMA-designated areas increased by approximately $100 million as of Dec. 31, 2017, as compared to Sept. 30, 2017," Radian said in a press release.

MGIC Investment Corp. in its earnings call said the storms reduced its PMIERs cushion by $100 million.

It was already speculated that private mortgage insurers might have to raise capital to comply with a PMIERs 2.0 proposal from Fannie Mae and Freddie Mac.

Concern over the size of Radian's cushion (only 7% or $237 million as of Sept. 30, 2017) in light of the proposal earlier this month led FBR Capital Markets analyst Randy Binner to downgrade his stock rating on the company to neutral.

Now Radian has increased its quota share reinsurance arrangements on single-premium policies to 65% from 35% for business written between 2015 and 2017 and business to be written over the next two years.

Then on Dec. 28, 2017, Radian Group transferred $100 million of cash and marketable securities to Radian Guaranty in exchange for a surplus note that has a 0% interest rate and matures on Dec. 31, 2027.

These two transactions increased the cushion to $450 million or 14% as of the end of 2017.

Radian expects to be able to fully comply with PMIERs 2.0 when it is finalized, without a need to take further actions. "The company's expectation is not dependent upon the existing surplus note and is based on its projections for positive operating results in 2018, its strong capital position, and the benefits of its reinsurance programs," the press release said.

Radian Group will announce its fourth quarter results on Feb. 1.

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