Mortgage insurance specialist NMI Holdings, Inc. is returning to the insurance-linked securities (ILS) markets for a second slice of collateralized mortgage reinsurance cover with its second mortgage ILS deal, a $264.55 million Oaktown Re II Ltd. transaction.
Oaktown Re II Ltd. has been recently established as a Bermuda special purpose insurer (SPI) designed to issue and sell tranches of mortgage insurance-linked notes to capital market investors, with the proceeds set to be used to collateralize reinsurance agreements between the issuing vehicle and the sponsor of the mortgage ILS deal.
For this second transaction of mortgage linked ILS notes for sponsor NMI Holdings and its subsidiary National Mortgage Insurance Corp, following the 2017 issuance of a $211.32 million Oaktown Re Ltd. (Series 2017-1) deal, the issuer is offering three tranches of notes to investors in order to collateralize the underlying excess of loss mortgage reinsurance arrangement between itself and National Mortgage Insurance Corp.
This capital markets-backed reinsurance arrangement will provide National Mortgage Insurance Corporation with $264.55 million of excess of loss reinsurance protection, covering an existing portfolio of its mortgage insurance policies.
The coverage will span a ten-year period, with final maturity for the notes issued being slated for July 2028.
The deal is split into three tranches of notes, Classes M-1, M-2, and B-1.
The Class M-1 tranche is targeting a size of $133.665 million, the Class M-2 $116.957 million and the Class B-1 $13.923 million.
Class M-1 is the most senior, having the lowest risk and Morningstar has given these notes a preliminary rating of BBB-. The Class M-2 is more risky, having been rated BB-. The Class B-1 is the most junior and risky layer of notes, with a preliminary rating of B+.
The notes are exposed to the performance of a pool of mortgage-insurance policies that are linked to residential loans. The residential mortgage loans are insured against certain losses through the underlying mortgage insurance policy pool, which are in turn covered by the reinsurance agreement with Oaktown Re II Ltd. that is to be collateralized by the sale of the mortgage insurance ILS notes.
The pool of insured loans are not in default, is geographically diverse with California the largest contributor to the risk at 14.1%, and is counted at 121,621 loans according to Morningstar.
The balance of the insured mortgage loans covered by the policies amounts to $30.21 billion, while the aggregate mortgage-insurance coverage totals $5.57 billion.
The notes are only exposed to the risk of reinsured losses on the pool of mortgage-insurance policies issued by National Mortgage Insurance Corporation.
These mortgage insurance linked securities transactions are not attractive to all ILS investors, given they are exposed to an element of risk that is correlated with broader financial factors, such as interest rates.
But, as a diversifying ILS investment there are many for whom this is attractive, as part of a broadly diversified ILS portfolio which would likely be dominated by catastrophe risks.
It’s encouraging to see NMI Holdings returning to the capital markets in search of more reinsurance for its National Mortgage Insurance Corporation subsidiary.
Given the ten-year tenure of these deals, the capital markets and an ILS or catastrophe bond-like structure offers these mortgage insurers a way to lock in mortgage reinsurance over long periods, providing greater financial certainty as well as access to efficient risk capital.
You can read all about this Oaktown Re II Ltd. mortgage insurance ILS transaction and every other ILS or cat bond in our comprehensive catastrophe bond and insurance-linked security Deal Directory.