Mortgage insurance underwriter MGIC, which is among the largest writers of mortgage insurers in the United States, is returning for its second mortgage insurance-linked securities (ILS) and insurance-linked notes deal, bringing a $315.74 million Home Re 2019-1 Ltd. transaction to market.
The transaction marks the second visit to the capital markets for mortgage reinsurance protection from MGIC Investment Corporation, following on from a $318.6 million Home Re 2018-1 Ltd. mortgage ILS deal that was issued last year.
For this second deal, MGIC Investment Corporation and its Mortgage Guaranty Insurance Corporation entity are using a new Bermuda-based special purpose insurer (SPI) Home Re 2019-1 Ltd. for the issuance of a $315.74 million mortgage insurance linked notes transaction.
The goal of the transaction and this issuance of $315.74 million of mortgage insurance-linked notes, is to secure a multi-year source of capital markets backed reinsurance capacity, tapping into investor appetite for the growing pool of mortgage ILS issuance.
MGIC said that the $315.74 million of notes to be issued notes are being offered for sale to eligible third-party capital markets investors through an unregistered private placement offering.
After the transaction is completed, MGIC’s wholly owned subsidiary Mortgage Guaranty Insurance Corporation (MGIC), will benefit from $315,739,000 of fully collateralized excess of loss reinsurance protection from Home Re 2019-1 Ltd. at inception.
The reinsurance protection will cover an existing portfolio of mortgage insurance policies that MGIC has underwritten with an insurance coverage in force date of between January 1st 2018 and April 1st 2019.
The transaction is structured into three tranches of notes, each being exposed to losses on the mortgage insurance portfolio at different levels.
An almost $148.6 million tranche of Class M-1 notes have been rated BBB- by Morningstar, while an equivalently sized $148.6 million Class M-2 tranche of notes has been rated BB-, so slightly riskier and an almost $18.6 million Class B-1 tranche riskier again with a B+ rating.
The notes being offered are all exposed to the risk of reinsurance losses on the subject business mortgage-insurance policies issued by Mortgage Guaranty Insurance Corp., the ceding insurer.
Morningstar explained that the transaction is geographically diverse, with the largest concentration of mortgage insurance loans seen in California, at 9.6% of the total pool. In addition, none of the loans covered by the insurance policies have ever been reported as delinquent.
The insured loans have a weighted average seasoning of 6 months, being relatively newly issued in the last year and a half, while the risk levels sit in the range covered by other mortgage ILS transactions we’ve seen and reported on.
MGIC said that each of the three tranches of 10-year maturity mortgage insurance-linked notes that are being issued by Home Re 2019-1 Ltd. have now been priced successfully.
The Class M-1 tranche (the lowest risk) has been priced with an initial interest spread of one-month LIBOR plus 165 basis points. The Class M-2 tranche has been priced at one-month LIBOR plus 325 basis points. While the riskiest Class B-1 tranche of notes has been priced at one-month LIBOR plus 435 basis points.
The offering of mortgage ILS notes by Home Re 2019-1 Ltd. is expected to be completed today, with no further changes expected now the transaction has been priced.
The mortgage ILS and insurance-linked note market continues down a path of rapid growth and given the amount of mortgage insurance risk available to transfer, this segment of the ILS market is likely to grow significantly bigger in years to come.
While the mortgage linked nature of these ILS transactions is not for every ILS investor, in fact many of the established ILS funds do not allocate capital to these deals, they do provide a welcome diversifier for capital markets investors who appreciate the insurance-linked returns, but are less concerned about the potential for financial market correlation within these arrangements.
The function of these notes is the same as a catastrophe bond, being sold to investors and the proceeds used to collateralize an underlying reinsurance agreement between the issuer and a ceding company.
You can read all about the Home Re 2019-1 Ltd. mortgage insurance-linked securities transaction and every other mortgage ILS deal in our specific directory of mortgage ILS deals, as well as in the all-encompassing Artemis Deal Directory.
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