After a pause during the peak of the Covid-19 pandemic, investors are returning to the mortgage insurance-linked securities (ILS) market, helping specialist mortgage insurer NMI Holdings, Inc. to successfully price its latest and fourth deal, a $322 million Oaktown Re IV Ltd. transaction.
NMI is the second sponsor of mortgage insurance-linked notes (ILN’s) to come to market since the coronavirus pandemic went global and capital markets locked up as a result.
That put the issuance of mortgage ILS into question, as the notes are clearly correlated with the pandemic itself, as has now been further evidenced by the continuing rise in Covid-19 driven mortgage delinquencies and the fact a number of outstanding mortgage ILS are now triggered.
But sponsors still benefit from this type of access to the capital markets, particularly at a time when reinsurance in general is getting more expensive and the private mortgage insurers market has become familiar with issuance of ILS or catastrophe bond like structures to cede mortgage risk to investors.
Hence it’s encouraging to see another mortgage ILS deal come to market during the ongoing Covid-19 pandemic, with NMI Holdings looking to expand its mortgage reinsurance from the capital markets with a new issuance.
Oaktown Re IV Ltd., a Bermuda domiciled special purpose insurer that was actually registered right back in April, but is only now being used, will seek to issue $322 million of mortgage insurance-linked notes that will be sold to investors and the proceeds used to collateralise underlying reinsurance agreements between the issuer and NMI.
The $322 million of 10-year mortgage insurance-linked notes issued by Oaktown Re IV will be placed with investors in an unregistered private offering that is expected to close on July 30th 2020.
Once issued successfully, this transaction will see NMI subsidiary National Mortgage Insurance Corporation (National MI) benefiting from $322 million of fully collateralized excess of loss reinsurance protection through Oaktown Re IV.
The mortgage reinsurance protection will cover an existing portfolio of mortgage insurance policies written from July 2019 through March 2020 for Nationam MI, protecting the insurer against aggregate losses on subject loans beginning at a 2.50% cumulative claim rate threshold and continuing up to an eventual 8.00% aggregate detachment level.
DBRS Morningstar has rated the three tranches of notes being issued by Oaktown Re IV Ltd.:
– $81.4 million Class M-1A at BBB (low) (sf)
– $125.4 million Class M-1B at BB (low)(sf)
– $98.3 million Class M-2 at B (low) (sf)
The rating agency further explained on this transaction, “The Notes are exposed to the risk arising from losses that the ceding insurer pays to settle claims on the underlying MI policies. As of the cut-off date, the pool of insured mortgage loans consists of 100,621 fully amortizing first-lien fixed- and variable-rate mortgages. They all have been underwritten to a full documentation standard, have original loan-to-value ratios (LTVs) less than or equal to 97%, and have never been reported to the ceding insurer as 60 or more days delinquent. The mortgage loans were originated on or after April 2019.”
National MI said that it “expects to receive initial PMIERs credit for the portion of coverage attaching within the current risk-based required asset charge on subject loans and additional benefit in the future if the PMIERs requirement on subject loans increases, all subject to GSE approval.”
That’s important, as the recent Bellemeade issuance from Arch did not provide the PMIERs credit it could have, being higher up in its reinsurance tower.
This Oaktown Re IV mortgage ILS transaction is also higher up, hence only a portion of the coverage is expected to qualify for PMIERs credit it seems.
Right now it seems mortgage insurers are going to have to position any new mortgage ILS deals higher up, to encourage the investor support they need.
With mortgage delinquencies expected to continue at elevated rates while the economic impacts of the Covid-19 pandemic persist, it could be some time before the capital markets is happy taking riskier tranches of mortgage insurance-linked notes.
You can read all about this new Oaktown Re IV Ltd. mortgage ILS transaction from NMI Holdings and every other mortgage ILS deal our comprehensive catastrophe bond and insurance-linked security Deal Directory.