U.S. mortgage insurer Radian Guaranty, part of the Radian Group, has successfully completed its first mortgage insurance-linked securities (ILS) transaction, securing a slightly upsized $434 million from the Eagle Re 2018-1 Ltd. transaction, while simultaneously adding another $21 million of excess-of-loss reinsurance coverage.
Radian said that this is the first time a mortgage ILS deal (or mortgage insurance-linked notes ILN deal) has been tied in to complete alongside a traditional excess-of-loss reinsurance placement as well.
The total mortgage reinsurance protection secured by Radian amounts to $455 million, with the vast majority provided by the firms successful first issuance of mortgage ILS notes through special purpose insurer Eagle Re 2018-1 Ltd.
“At Radian, we have a successful track record of sourcing, underwriting, managing and distributing mortgage credit risk, and we are pleased to execute this combined transaction that is the first of its kind in our industry,” explained Radian’s Chief Executive Officer Rick Thornberry.
The $434 million of capital markets investor backed reinsurance was sourced through the Eagle Re 2018-1 Ltd. transaction and the issuance of mortgage insurance-linked notes that were sold to eligible third-party capital markets investors and used to collateralize the underlying reinsurance agreements between the SPI and Radian.
At the same time, Radian Guaranty agreed to terms on a separate excess of loss (XOL) reinsurance agreement for $21 million of protection from a third-party global reinsurer.
The mortgage ILS and mortgage reinsurance both provide Radian with protection across the same portfolio of mortgage insurance policies, with the XOL reinsurance co-participating alongside two tranches of the Eagle Re notes.
At launch all three tranches of Eagle Re 2018-1 notes were mooted to be only providing 90% of coverage across their layers, but at close it transpires that the largest tranche has been upsized to provide 100% of coverage across the layer of risk it reinsures.
Hence, the Class M-1 tranche of mortgage ILS notes has increased in size from the $217.3 million that we featured in our article revealing this transaction a couple of weeks ago, to have settled at $241.4 million in size.
The other two tranches remained as a $168.1 million tranche of Class M-2 notes and a $24.6 million tranche of Class B-1 notes, both of which cover 90% of their respective layers alongside the excess-of-loss reinsurance protection.
All three classes of notes have 10-year final maturities and Radian Guaranty has an option to call them after five years.
Radian appears to have been testing both traditional reinsurance and ILS markets with this deal and said that the resulting structure provides it with the flexibility it needed to engage both reinsurance and capital markets regularly in future.
It also allows Radian to control how much risk is transferred to each capital source, depending on market conditions and appetite for the risk.
Radian CEO Thornberry commented, “We believe there are a number of strategic benefits from leveraging and regularly accessing both the capital and reinsurance markets to distribute risk, including a reduction in our overall cost of capital, increased capital efficiency, and most importantly, the opportunity to reduce portfolio and financial volatility through economic cycles.”
That’s a smart use of the ILS structure alongside traditional reinsurance, ensuring Radian can benefit from the appetite in both markets.
Given the upsizing of the Class M-1 tranche, that had been expected to only cover 90% of its layer but increased to 100% during marketing, it appears that Radian may have found the capital market pricing of the ILS notes as efficient, or more so, than its traditional reinsurance equivalent.