Reinsurance

In the ordinary course of business, our insurance subsidiaries may use reinsurance to provide protection against adverse loss experience and to expand our capital sources. Reinsurance recoverables are recorded as assets, predicated on a reinsurer's ability to meet their obligations under the reinsurance agreements. If the reinsurers are unable to satisfy their obligations under the agreements, our insurance subsidiaries would be liable for such defaulted amounts.

Essent Guaranty has entered into fully collateralized reinsurance agreements with unaffiliated special purpose insurers domiciled in Bermuda ("Radnor Re Transactions"). For the reinsurance coverage periods, Essent Guaranty and its affiliates retain the first layer of the respective aggregate losses, and a Radnor Re special purpose insurer will then provide second layer coverage up to the outstanding reinsurance coverage amount. Essent Guaranty and its affiliates retain losses in excess of the outstanding reinsurance coverage amount. The reinsurance premium due to each Radnor Re special purpose insurer 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 risk margin, and then subtracting actual investment income collected on the assets in the related reinsurance trust during that period. The aggregate excess of loss reinsurance coverage decreases over a ten-year period as the underlying covered mortgages amortize. Essent Guaranty has rights to terminate the Radnor Re Transactions, which include an option to terminate the reinsurance agreement with Radnor Re 2018-1 Ltd. after five years from issuance and an option to terminate the reinsurance agreement with Radnor Re 2019-1 Ltd. after seven years from issuance. If the reinsurance agreement with Radnor Re 2018-1 Ltd. is not terminated after five years from issuance, the risk margin component of the reinsurance premium payable to Radnor Re 2018-1 Ltd. increases by 50%. If the reinsurance agreement with Radnor Re 2019-1 Ltd. is not terminated after seven years from issuance, there is no increase in the the risk margin component of the reinsurance premium payable to Radnor Re 2019-1 Ltd. The Radnor Re entities financed the coverage by issuing mortgage insurance-linked notes ("ILNs") in an aggregate amount equal to the initial coverage to unaffiliated investors. The notes have ten-year legal maturities and are non-recourse to any assets of Essent Guaranty or its affiliates. The proceeds of the notes were deposited into reinsurance trusts for the benefit of Essent Guaranty that will be the source of reinsurance claim payments to Essent Guaranty and principal repayments on the ILNs.

Essent Guaranty has also entered into reinsurance agreements with a panel of reinsurers that provide aggregate excess of loss coverage immediately above or pari-passu to the coverage provided by the Radnor Re Transactions. The aggregate excess of loss reinsurance coverage decreases over a ten-year period as the underlying covered mortgages amortize. Essent Guaranty has rights to terminate the reinsurance agreement, which includes an option to terminate after five years from issuance. If the reinsurance agreement is not terminated after five years from issuance, the reinsurance premium payable will increase by 50%.

The following table summarizes the respective coverages and retentions as March 31, 2019:



(In thousands)					Remaining Reinsurance in Force
Origination Year	Remaining Insurance in Force		Remaining Risk in Force		ILN			Other Reinsurance			Total		Remaining First Layer Retention
2017	$	35,526,434	$	8,869,353	$	424,412	(1)	$	165,167	(2)	$	589,579	$	224,453
2018	43,948,691		11,010,711		473,184		(3)	118,650		(4)	591,834		253,643
Total	$	79,475,125	$	19,880,064	$	897,596		$	283,817		$	1,181,413	$	478,096


(1)	Reinsurance provided by Radnor Re 2018-1 Ltd., through its issuance of ILNs, effective March 2018.


(2)	Reinsurance provided by a panel of reinsurers effective November 2018. Coverage provided immediately above the coverage provided by Radnor Re 2018-1 Ltd.


(3)	Reinsurance provided by Radnor Re 2019-1 Ltd., through its issuance of ILNs, effective February 2019.


(4)	Reinsurance provided by a panel of reinsurers effective February 2019. Coverage provided pari-passu to the coverage provided by Radnor Re 2019-1 Ltd.

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



	Three Months Ended March 31,
(In thousands)	2019			2018
Net premiums written:
Direct	$	183,682		$	165,519
Ceded	(6,038		)	(294		)
Net premiums written	$	177,644		$	165,225

Net premiums earned:
Direct	$	183,829		$	152,852
Ceded	(6,038		)	(294		)
Net premiums earned	$	177,791		$	152,558

The amount of monthly reinsurance premium ceded to the Radnor Re entities will fluctuate due to changes in one-month LIBOR and changes in money market rates that affect investment income collected on the assets in the reinsurance trusts. As the reinsurance premium will vary based on changes in these rates, we concluded that the Radnor Re Transactions contain embedded derivatives that will be accounted for separately like freestanding derivatives.

In connection with the Radnor Re Transactions, we concluded that the risk transfer requirements for reinsurance accounting were met as each Radnor Re entity is assuming significant insurance risk and a reasonable possibility of a significant loss. In addition, we assessed whether each Radnor Re entity was a variable interest entity ("VIE") and the appropriate accounting for the Radnor Re entities if they were VIEs. A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make significant decisions relating to the entity’s operations through voting rights or do not substantively participate in the gains and losses of the entity. A VIE is consolidated by its primary beneficiary. The primary beneficiary is the entity that has both (1) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. While also considering these factors, the consolidation conclusion depends on the breadth of the decision-making ability and ability to influence activities that significantly affect the economic performance of the VIE. We concluded that the Radnor Re entities are VIEs. However, given that Essent Guaranty (1) does not have the unilateral power to direct the activities that most significantly affect their economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits that could be potentially significant to these entities, the Radnor Re entities are not consolidated in these financial statements.

The following table presents total assets of each Radnor Re special purpose insurer as well as our maximum exposure to loss associated with each Radnor Re entity, representing the fair value of the embedded derivative included in other assets on our condensed consolidated balance sheet and the estimated net present value of investment earnings on the assets in the reinsurance trust, each as of March 31, 2019:



			Maximum Exposure to Loss
(In thousands)	Total VIE Assets		On - Balance Sheet		Off - Balance Sheet		Total
Radnor Re 2018-1 Ltd.	$	424,412	$	1,288	$	18,051	$	19,339
Radnor Re 2019-1 Ltd.	473,184		136		27,246		27,382
Total	$	897,596	$	1,424	$	45,297	$	46,721