Mortgage insurance specialist underwriter NMI Holdings, Inc. has returned with its third insurance-linked securities (ILS) transaction and it is the largest to-date, a $327 million Oaktown Re III Ltd. transaction.
This third issuance of mortgage insurance-linked notes for sponsor NMI Holdings and its subsidiary National Mortgage Insurance Corp., follows the issuance of a $211.32 million Oaktown Re Ltd. (Series 2017-1) deal in 2017 and a $264.55 million Oaktown Re II Ltd. in 2018.
NMI has returned to secure additional collateralized mortgage reinsurance protection from the capital markets in an ILS transaction for its wholly owned subsidiary National Mortgage Insurance Corporation.
A new Bermuda based special purpose insurance vehicle has been registered for NMI’s third mortgage ILS transaction, with Oaktown Re III Ltd. set to issue five tranches of notes to support the transaction.
The five tranches of notes, totaling $327 million of principal, will be sold to third-party capital market investors and the proceeds used to collateralize underlying reinsurance agreements between Oaktown Re III and NMI’s subsidiary.
As a result of the transaction, National Mortgage Insurance Corporation will receive $327 million of fully collateralized excess of loss reinsurance protection from Oaktown Re III, the company explained.
The reinsurance will provide NMI with coverage across an existing portfolio of mortgage insurance policies that it has underwritten between June 2018 through June 2019.
The mortgage insurance-linked notes will have a 10-year tenure, with each of the five tranches providing coverage across different levels of NMI’s mortgage reinsurance program.
The $327 million of mortgage ILS notes to be issued by Oaktown Re III are split into a $100.073m tranche of Class M-1A notes, a $100.073 tranche of Class M-1B notes, a $93.401m tranche of Class M-2 notes, a $16.679m tranche of Class B-1A notes and a $16.679m tranche of Class B-1B notes.
The tranches of notes have now all been priced, with the Class M-1A priced at one-month LIBOR plus 1.40%, Class M-1B at LIBOR plus 1.95%, Class M-2 at LIBOR plus 2.55%, Class B-1A at LIBOR plus 3.50% and Class B-1B at LIBOR plus 4.35%.
Rating agency Morningstar highlighted some points on the transactions covered portfolio, saying:
The pool of insured mortgage loans consists of fully amortizing, fixed- and variable-rate, first-lien loans. The pool is geographically diverse, with the largest state concentration in California at approximately 11.5% of the unpaid principal balance. The diverse pool of 116,632 loans reduces geographic concentration risk.
The majority of the mortgage loans subject to the mortgage-insurance policies for which the reinsurance agreement provides reinsurance coverage conform to the guidelines of the government sponsored enterprises, which generally have tight acquisition guidelines and origination processes and produce a homogenous reference pool. The historical performance of these GSE loans and other similar agency loans has been strong. As of the cutoff date, the loans in the pool have never been reported as being delinquent, according to the ceding insurer. No mortgage loan has ever been reported to the ceding insurer as modified as of the cutoff date. None of the loans are interest-only, and all have full documentation.
These mortgage insurance-linked securities transactions are increasingly adding to mortgage insurers reinsurance provisions, enabling them to better meet their PMIERs requirements.
They offer an efficient way for mortgage insurers to tap into the capital markets and ILS investor appetites for reinsurance linked investments, offering them a vehicle through which long-term and fully-collateralized mortgage reinsurance capacity can be acquired at efficient rates.
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.