ILS is insulation for adverse mortgage insurance losses: NMI CEO Merkle

Mortgage insurance specialist NMI Holdings, Inc. successfully completed its third and largest insurance-linked securities (ILS) transaction, the $327 million Oaktown Re III Ltd., and CEO Claudia Merkle highlighted how these capital market backed reinsurance transactions insulate it against adverse losses.

NMI returned recently to secure $327 million of excess of loss reinsurance coverage for the National MI mortgage insurance portfolio, the company’s third insurance-linked notes transaction.

Previously, NMI Holdings and its subsidiary National Mortgage Insurance Corp., secured a $211.32 million Oaktown Re Ltd. (Series 2017-1) insurance-linked securities (ILS) transaction in 2017 and a $264.55 million Oaktown Re II Ltd. in 2018.

This $327 million Oaktown Re III Ltd. Series 2019-1 transaction was therefore the insurers largest insurance-linked securitization of its mortgage insurance risk so far.

The transaction successfully completed at the end of July, leaving NMI with an enlarged source of reinsurance capital to support its required Private Mortgage Insurer Eligibility Requirements (PMIERs) capital.

Commenting on the successful completion of the transaction when announcing quarterly results this week, National MI CEO Merkle explained, “We also succeeded with our third Insurance-Linked Notes offering, further extending our comprehensive credit risk management framework.

“The $327 million offering, which closed earlier this week, provides significant incremental PMIERs capital support and helps to insulate National MI from adverse loss in our insured portfolio.”

As U.S. mortgage insurers have grown their books substantially in recent years, the capital markets and transactions that securitize the insurance risk, to transfer it to capital market investors in the style of a catastrophe bond, have become increasingly popular.

The mortgage ILS market has exploded in recent years, with now over $7.8 billion of mortgage insurance-linked notes transactions documented in our Deal Directory.

Even with the size of the transactions increasing for NMI, the costs it has reported remain the same as the prior year.

The insurer reported that in Q2 it paid out $0.7 million of fees and expenses related to its new Oaktown Re III transaction, which is the same as it paid out in Q2 2018 for the prior year ILN arrangement.

To complete the new transaction National Mortgage Insurance Corp. entered into a reinsurance agreement with Oaktown Re III Ltd. to provide it with $327 million of aggregate excess-of-loss reinsurance coverage for new delinquencies on an existing portfolio of mortgage insurance policies underwritten between June 1st 2018 and June 30th 2019.

The insurer retains the first loss layer of $123.4 million of aggregate losses that sits beneath the Oaktown Re III deal, with the notes issued then providing second layer coverage up to the limit issued, while NMI then retains any losses in excess of this.

Access to the capital markets using insurance-linked securities (ILS) is becoming an increasingly important tool for U.S. mortgage insurers, as some would not be able to sustain such large portfolios without them.

Akin to how property catastrophe reinsurers use third-party capital, these ILN transactions are providing mortgage insurers with a flexible and efficient second balance-sheet source that can assist them in managing their PMIER requirements.

You can read all about this $327 million Oaktown Re III Ltd. mortgage insurance ILS transaction and every other ILS or cat bond in our comprehensive catastrophe bond and insurance-linked security Deal Directory.