Mortgage insurer Essent Guaranty is returning to the capital markets for additional excess-of-loss reinsurance in 2019 with its second mortgage insurance-linked securities (ILS) transaction, an almost $444 million Radnor Re 2019-1 Ltd. deal that has recently launched to investors.
Essent Guaranty sponsored the $424.4 million Radnor Re 2018-1 Ltd. transaction in 2018, its first mortgage ILS, or insurance-linked note, transaction and a source of what the company sees as diversifying risk capital.
The company said it was likely to return in 2019 to issue another mortgage ILS deal, to add further multi-year fully-collateralized excess of loss reinsurance protection for an existing portfolio of mortgage insurance policies.
The new transaction has now been launched to the investor community, with Essent seeking to add almost $444 million of additional mortgage reinsurance protection from the capital markets with this new deal.
Essent Guaranty has registered a new Bermuda domiciled special purpose insurer (SPI) for its second mortgage ILS transaction, Radnor Re 2019-1 Ltd.
The SPI will seek to issue four tranches of notes that will be sold to investors from the capital markets, some of which will be the typical ILS fund manager suspects.
The proceeds from the sale of these notes will be utilised to collateralize underlying reinsurance agreements that will provide Essent with excess-of-loss coverage for its 2018 mortgage insurance book.
Essent has taken the strategy of acquiring its reinsurance at the end of each underwriting year, and the company actually added to the 2018 Radnor Re deal with a $165 million layer of traditional reinsurance it acquired in December 2018 and that sits atop the Radnor Re 2018 notes.
The coverage from the Radnor Re 2019-1 mortgage ILS transaction will protect Essent against losses on a pool of mortgage-insurance policies linked to residential loans.
None of the 183,944 covered loans included in this deal were in default as of the cut-off date for the transaction and the largest state concentration is in California, at 9.2%.
As the reference mortgage insurance policies face losses and these losses reach attachment points for each tranche of notes, Essent Guaranty they benefit from reinsurance coverage afforded by the collateral backing each tranche of notes.
The balance of the insured mortgage loans covered by the subject policies is $45.04 billion, while the aggregate of the mortgage-insurance policy coverage amount is $11.27 billion.
Radnor Re 2019-1 Ltd. is offering to investors an $84.55 million Class M-1A tranche of notes, a $160.64 million Class M-1B tranche, a $177.55 million Class M-2 tranche, and a $21.14 million Class B-1 tranche of notes (all rounded). The transaction actually totals $433.874 million in size.
All of the mortgage insurance-linked notes issued through this Radnor Re 2019-1 transaction are exposed to the risk of reinsured losses on the portfolio of mortgage insurance policies covered by the deal.
All four tranches of notes have 10 year maturities, with February 2029 the stated final maturity for the transaction.
Losses would eat their way up through the tranches of notes, from the B-1 layer upwards as losses under the reinsurance agreements expanded.
Essent Guaranty’s senior executives said during its earnings call last week that the use of the capital markets alongside its traditional mortgage reinsurance shows its ability to, “evolve into a more sophisticated risk manager by distributing risk and diversifying our sources of capital.”
CEO Mark Casale said, “Distributing risk to the capital markets and reinsurers is not only a hedge to our cycle-dependent franchise, but can also be accretive to returns by freeing up capital at a lower cost, without adding financial leverage to the balance-sheet.
“We believe that this strategy, along with future earnings, should generate excess capital going forward.”
He went on to explain that Essent Guaranty sees itself as well-capitalised as it has ever been right now, with the insurance-linked note transactions helping to drive excess capital for the firm.
The target at Essent is to get as much of its mortgage insurance book covered by reinsurance as possible at the end of each underwriting year, hence the company is expected to make these mortgage ILS deals a significant piece of its reinsurance and capital strategy going forwards.
These mortgage ILS transaction allow Essent to leverage the depth of capacity available from the capital markets and insurance-linked securities (ILS) as a way to augment its reinsurance protection for mortgage insurance books, while diversifying their sources of reinsurance capital, all in a fully-collateralized transaction similar to a catastrophe bond.
They also provide an efficient way to better manage its risk and capital, freeing up significant capital that Essent would otherwise have had to hold against these mortgage insurance risks, thus helping to drive excess capital for the insurer which will please its shareholders and investors.