Mortgage insurance specialist MGIC, one of the largest mortgage insurers in the United States, is to enter the mortgage insurance-linked securities (ILS) and insurance-linked notes market with its first transaction, a $318.6 million Home Re 2018-1 Ltd. transaction.
The goal of the transaction and the issuance of $318.6 million of mortgage linked notes is to secure a multi-year source of capital markets backed reinsurance capacity.
MGIC Investment Corporation, the parent of Mortgage Guaranty Insurance Corporation (MGIC), underwrote roughly $500 million of premium in the first-half of 2018 and has around $200 billion of primary mortgage insurance in force.
As a result the company has been watching the mortgage ILS wave closely, as we recently explained here, watching as competitors tapped the capital markets for a source of collateralized mortgage reinsurance. With a portfolio that covers more than one million mortgages in-force it was only a matter of time until the firm entered the market.
The company said that its Mortgage Guaranty Insurance Corporation entity intends to proceed with a capital markets-based reinsurance transaction, which it will enter into with a newly formed Bermuda special purpose insurer.
We understand that the SPI in question is Home Re 2018-1 Ltd., which was registered in Bermuda in September.
This is unsurprising, as MGIC had completed securitisations back in the mid-2000’s using the Home Re moniker, although these were a little different in structure to the current and recent wave of mortgage ILS for reinsurance purposes.
MGIC said that it anticipates purchasing $318.6 million of excess of loss reinsurance protection from Home Re 2018-1, to provide coverage for an existing portfolio of mortgage insurance policies.
Simultaneously, Home Re 2018-1 will issue an identical amount of unregistered securities which will be sold to third-party capital markets investors, providing the collateral to back the reinsurance coverage agreement.
The Home Re 2018-1 mortgage ILS transaction will be split into three tranches of notes. A $142.449 million tranche of Class M-1 notes, rated BBB- by Morningstar, a $157.444 million tranche of Class M-2 notes, rated B+, and a $18.743 million tranche of Class B-1 notes which are also rated B+.
The balance of the insured mortgage loans covered by the policies is approximately $54.55 billion, while the aggregate of the mortgage-insurance policy coverage amount is approximately $7.50 billion. The notes will provide the $318.6 million of mortgage reinsurance, while MGIC will retain a significant portion of the remaining coverage layers.
The weighted average seasoning of the loans is 14 months, making this one of the older loan mortgage ILS transactions seen to date.
MGIC said that its Home Re 2018-1 Ltd. mortgage insurance-linked note offering is expected to be completed by the end of October 2018.
It’s encouraging to see another major mortgage insurer turning to the capital markets for a source of efficient mortgage reinsurance capacity.
We understand that for MGIC the rationale behind the deal is as much capital driven as reinsurance, with the Home Re 2018 transaction likely to offset the majority of the impacts due to changes in the Private Mortgage Insurer Eligibility Requirements (PMIERs).
The mortgage ILS and insurance-linked note market is growing fast and given the amount of mortgage insurance risk available this niche segment of ILS may end up growing significantly larger in years to come.
While the mortgage linked nature of the transactions is not for every ILS investor and in fact many ILS funds do not allocate capital to these deals, the mortgage ILS notes do provide a welcome diversifier for capital markets investors who appreciate the insurance-linked returns but are less concerned about the potential for some financial market correlation within these deals.