Essent Guaranty has returned to the capital markets in recent weeks with a successful new issuance of mortgage insurance-linked notes, as a Radnor Re 2020-2 Ltd. transaction helped it add $399.2 million of excess of loss mortgage reinsurance backed by capital market investors.
This Radnor Re 2020-2 issuance of mortgage insurance-linked securities (ILS) is Essent Guaranty’s fifth such transaction and its second of 2020.
However, it is the insurers first mortgage ILS issuance since the COVID-19 pandemic broke out and impacted capital markets and also mortgage delinquencies, so this successful issuance is another sign of market conditions settling down and investor appetite for mortgage insurance risk in securitized form returning.
A new Bermuda domiciled special purpose insurance company (SPI) has been registered for the purposes of this mortgage ILS issuance, Radnor Re 2020-2 Ltd.
The SPI has issued five tranches of mortgage ILS notes that have been sold to investors, with the proceeds used to collateralize underlying excess of loss mortgage reinsurance agreements between Radnor Re 2020-2 Ltd. and the sponsor Essent Guaranty.
Each class of mortgage insurance-linked notes have 10-year legal maturities and have been sold to eligible third party capital markets investors in an unregistered private offering.
The $399.2 million mortgage ILS deal consists of the following five classes:
- $79,832,000 Class M-1A Notes with an initial interest rate of one-month LIBOR plus 315 basis points;
- $93,137,000 Class M-1B Notes with an initial interest rate of one-month LIBOR plus 400 basis points;
- $93,137,000 Class M-1C Notes with an initial interest rate of one-month LIBOR plus 460 basis points;
- $99,790,000 Class M-2 Notes with an initial interest rate of one-month LIBOR plus 560 basis points;
- $33,263,000 Class B-1 Notes with an initial interest rate of one-month LIBOR plus 760 basis points;
We’d imagine these likely sit a little further along the risk curve than previous mortgage ILS from Essent, as the insurer had reported elevated mortgage delinquencies that had triggered some of its outstanding mortgage ILS notes.
As a result, investors have been looking to slightly less risky tranches of mortgage ILS, taking them above where delinquency rates had impacted the mortgage insurance market. But at the same time, the pricing on these tranches will likely be considerably higher, on a risk adjusted basis, than transactions isssued pre-COVID.