U.S. mortgage insurer Radian Guaranty, part of the Radian Group, has now successfully completed its latest and third mortgage insurance-linked securities (ILS) transaction, with a $488.4 million Eagle Re 2020-1 Ltd. transaction.
The arrangement sees Radian Guaranty now benefiting from a new capital markets backed source of excess-of-loss mortgage reinsurance protection, secured through a securitized catastrophe bond like structure.
It’s not all about better protection though.
As ever, the use of insurance-linked securities (ILS) to bring efficient capital within an insurance or reinsurance business model is not simply about protecting yourself, or hedging the risk.
It’s about bringing capital into your businesses structure in a form that is additive and Radian stresses that the Eagle Re mortgage insurance-linked notes (ILN’s) lower its overall cost-of-capital, while increasing its capital efficiency and also enhancing its return on capital.
A win, win, win, some might say, not even considering the protection against significant mortgage insurance loss events.
Radian does note that the mortgage ILS notes transfer risk in the event of adverse development of the reinsured business, but that it seems is perhaps a lower priority than leveraging efficient capital markets funding to support, add to and optimise its own capital stack.
In announcing the successful completion of the mortgage ILS transaction, which we covered in more detail here recently, Radian said that its subsidiary Radian Guaranty Inc. has obtained $488 million of fully collateralized excess of loss reinsurance coverage from Eagle Re 2020-1 Ltd.
This excess of loss reinsurance protection covers eligible mortgage insurance policies underwritten by Radian Guaranty between January and September of 2019, excluding single premium payment policies.
The reinsurance obligations of Eagle Re 2020-1 have been funded through the issuance of mortgage insurance-linked notes, amounting to $488.4 million and coming in five classes with a 10-year maturity and 7-year call option.
The transaction is split into:
- $83,864,000 Class M-1A Notes with a coupon equal to one-month LIBOR plus 90 basis points
- $133,196,000 Class M-1B Notes with a coupon equal to one-month LIBOR plus 145 basis points
- $88,797,000 Class M-1C Notes with a coupon equal to one-month LIBOR plus 180 basis points
- $157,860,000 Class M-2 Notes with a coupon equal to one-month LIBOR plus 200 basis points
- $24,668,000 Class B-1 Notes with a coupon equal to one-month LIBOR plus 285 basis points
For the first time, this mortgage ILS transaction gives investors the option to exchange their M-2 Notes for proportionate interests in Class M-2A Notes, Class M-2B Notes and Class M-2C Notes (Exchangeable Notes), and the Exchangeable Notes may be exchanged for Class M-2 Notes with the same proportionate interest, Radian explained.
This is the first time any mortgage ILS transaction such as this has incorporated this Exchangeable Notes feature., adding flexibility to the offering for investors.