NMI Holdings has successfully completed its first securitization of mortgage insurance risks, with the issuance of the $211.32 million of Oaktown Re Ltd. (Series 2017-1) insurance-linked notes that have secured it a source of reinsurance from the capital markets that also helped free up underwriting capital, according to the CEO.
NMI Holdings wholly owned subsidiary National Mortgage Insurance Corporation was the official sponsor of the Oaktown Re 2017-1 mortgage insurance-linked securities (ILS) issuance, as it sought out fully-collateralized excess of loss mortgage reinsurance coverage from capital market investors for the first time.
In fact, the Oaktown Re mortgage insurance ILS deal is only the third we know of and National Mortgage Insurance only the second sponsor of this type of ILS that transfers the risks associated with mortgage insurance defaults to the capital markets.
AIG was the first, with two transactions, Bellemeade Re Ltd. (Series 2015-1) and Bellemeade Re II Ltd. (Series 2016-1), that provide its United Guaranty subsidiary with reinsurance cover for its mortgage insurance portfolio.
The transaction completed on the 2nd May, with the three tranches of notes issued by Bermuda based SPI issuance vehicle Oaktown Re Ltd. all listed on the Bermuda Stock Exchange (BSX).
The sizes and pricing of each tranche of mortgage insurance linked notes did not change, with a $98.616 million Class M-1 tranche of notes paying investors a coupon of 2.25% above one-month Libor, a $98.616 million Class M-2 tranche 4% above Libor and a $14.088 million Class B-1 tranche of notes paying 5.75% above Libor. All three tranches of notes have a 10-year term, making this the longest duration risk in ILS outside of the life space we believe.
The reinsurance coverage provided is just one element of the Oaktown Re mortgage insurance ILS transaction, the other angle is a tool to free up capital which can effectively allow NMI Holdings to underwrite more mortgage insurance risk.
CEO and Chairman of NMI Bradley Shuster commented that; “We executed an Insurance-Linked Notes transaction that enhances National MI’s financial strength by providing a layer of protection against adverse losses.”
But added that as well as the protection against losses, the Oaktown Re ILS transaction provides; “Expected additional writing capacity under PMIERs of approximately $200 million.”
That’s Private Mortgage Insurer Eligibility Requirements (PMIERs), the U.S. Federal Housing Finance Agency rules regarding financial standards and operating requirements that private mortgage insurers must operate under.
By freeing up capacity under PMIER National Mortgage Insurance has both protected itself and at the same time, using the same capital, extended its capacity as well, a kind of additional and no doubt welcome leverage.
Shuster also revealed the cost of the Oaktown Re transaction to NMI Holdings, saying; “Our estimated after-tax cost of this coverage and capital relief is approximately three percent.”
Further to this, the company said that fees and expenses of $1.6 million in the first-quarter of 2017 contained the Oaktown Re deal, as well as another loan repricing and extension transaction.
It’s often the case that ILS transactions can provide a form of capital relief, just like their traditional reinsurance counterparts can.
Add in the benefits of diversifying reinsurance counterparties, the lack of counterparty risk and of course the efficient, low-cost nature of the capital markets that a fully-collateralized insurance-linked securitization offers, and it’s easy to see what attracted NMI Holdings to enter this market.
You can read all about this Oaktown Re Ltd. (Series 2017-1) mortgage insurance ILS transaction and every other ILS or cat bond in our comprehensive catastrophe bond and insurance-linked security Deal Directory.
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