Moody's Approves of Radian Guaranty's Reinsurance Deal; Downgrades Holding Co.

Moody's Investors Service gave a thumbs up to mortgage insurer Radian Guaranty's plan to enter into a quota-share-reinsurance agreement, but the ratings agency still downgraded Radian Group's senior-debt rating due to constrained liquidity.

In its Weekly Credit Outlook, Moody's says Radian is ceding a 20 percent quota share of new production—including $532 million of its risk written since the 2011 fourth quarter and up to $1.25 to $1.6 billion of risk in-force—to an unnamed reinsurer.

“The deal improves Radian's regulatory risk-to-capital ratio, an important financial metric for mortgage insurers that has been under pressure owing to losses on its legacy book,” Moody's says.

The ratings agency adds that the deal helps Radian free up regulatory capital. However, Moody's adds that, even with the deal, Radian is still expected later this year to breach the 25-to1 risk-to-capital threshold that some states require companies to meet in order to write business without receiving a waiver.

Radian has received waivers from regulators and counterparties, Moody's notes, adding that most of Radian's peers have already breached the 25-to-1 threshold.

Discussing the benefit Radian's reinsurance deal may have on the overall market, Moody's says, “Radian's transaction may compel peers…to alleviate more capital pressure through reinsurance, commutations and the like.”

But yesterday, Moody's said it is downgrading parent company Radian Group's senior-debt rating to Caa2 from Caa1, reflecting “the holding company's constrained liquidity, the ongoing stress at its mortgage-insurance subsidiaries, and its upcoming debt maturities.”

The ratings agency did say it is confirming the insurance financial strength ratings of Radian Guaranty and other subsidiaries. For Radian Guaranty, Moody's points to its consolidated financial resources and ability to continue to write new business due to the waivers it was granted.