Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Oaktown Re III Ltd.

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Oaktown Re III Ltd. – At a glance:

  • Issuer: Oaktown Re III Ltd.
  • Cedent / sponsor: National Mortgage Insurance Corporation
  • Placement / structuring agent/s: ?
  • Risk modelling / calculation agents etc: Unknown
  • Risks / perils covered: Mortgage insurance risks
  • Size: $327m
  • Trigger type: Indemnity
  • Ratings: Morningstar: M-1A - BBB+, M-1B - BBB-, Class M-2 - BB-, Class B-1A - BB-, Class B-1B - B+
  • Date of issue: Jul 2019

Oaktown Re III Ltd. – Full details:

This is the third and largest mortgage insurance-linked notes transaction from NMI Holdings Inc. to-date, as it looks to secure additional collateralized mortgage reinsurance protection from the capital markets in an ILS transaction for its wholly owned subsidiary National Mortgage Insurance Corporation.

A new Bermuda based special purpose insurance vehicle has been registered for NMI’s third mortgage ILS transaction, with Oaktown Re III Ltd. set to issue five tranches of notes to support the transaction.

The five tranches of notes, totaling $327 million of principal, will be sold to third-party capital market investors and the proceeds used to collateralize underlying reinsurance agreements between Oaktown Re III and NMI’s subsidiary.

As a result of the transaction, National Mortgage Insurance Corporation will receive $327 million of fully collateralized excess of loss reinsurance protection from Oaktown Re III, the company explained.

The reinsurance will provide NMI with coverage across an existing portfolio of mortgage insurance policies that it has underwritten between June 2018 through June 2019.

The mortgage insurance-linked notes will have a 10-year tenure, with each of the five tranches providing coverage across different levels of NMI’s mortgage reinsurance program.

The $327 million of mortgage ILS notes to be issued by Oaktown Re III are split into a $100.073m tranche of Class M-1A notes, a $100.073 tranche of Class M-1B notes, a $93.401m tranche of Class M-2 notes, a $16.679m tranche of Class B-1A notes and a $16.679m tranche of Class B-1B notes.

The tranches of notes have now all been priced, with the Class M-1A priced at one-month LIBOR plus 1.40%, Class M-1B at LIBOR plus 1.95%, Class M-2 at LIBOR plus 2.55%, Class B-1A at LIBOR plus 3.50% and Class B-1B at LIBOR plus 4.35%.

Rating agency Morningstar highlighted some points on the transactions covered portfolio, saying:

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The pool of insured mortgage loans consists of fully amortizing, fixed- and variable-rate, first-lien loans. The pool is geographically diverse, with the largest state concentration in California at approximately 11.5% of the unpaid principal balance. The diverse pool of 116,632 loans reduces geographic concentration risk.

The majority of the mortgage loans subject to the mortgage-insurance policies for which the reinsurance agreement provides reinsurance coverage conform to the guidelines of the government sponsored enterprises, which generally have tight acquisition guidelines and origination processes and produce a homogenous reference pool. The historical performance of these GSE loans and other similar agency loans has been strong. As of the cutoff date, the loans in the pool have never been reported as being delinquent, according to the ceding insurer. No mortgage loan has ever been reported to the ceding insurer as modified as of the cutoff date. None of the loans are interest-only, and all have full documentation.

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