Radian Guaranty has returned to the capital markets for its second mortgage insurance-linked securities (ILS) deal, marketing a $562 million Eagle Re 2019-1 Ltd. transaction in search of reinsurance backing from the capital markets.
The transaction follows Radian Guaranty’s first mortgage ILS, or mortgage insurance-linked notes (ILN), transaction, the $434 million from the Eagle Re 2018-1 Ltd. transaction issued during the fourth-quarter of 2018.
Demonstrating the growing appetite to tap the capital markets for mortgage reinsurance, Radian Guaranty has already returned to the market with this second transaction, a larger deal but one that covers a different risk profile for the insurer.
Radian Guaranty is seeking the $562 million of capital market investor backed reinsurance through the use of recently registered special purpose insurer (SPI) Eagle Re 2019-1 Ltd.
Eagle Re 2019-1 Ltd. will issue four tranches of mortgage insurance-linked notes that will be sold to eligible third-party capital market investors, with the proceeds used to collateralize underlying reinsurance agreements between the SPI and Radian itself.
The use of capital markets capacity for mortgage reinsurance is becoming an increasing trend and while these mortgage ILS transactions don’t appeal to the majority of what we’d traditionally term ILS investors, given their clear correlation with financial market factors, they do appeal to large institutional investors elsewhere in their portfolios and as they use a typical ILS or catastrophe bond structure they are another interesting example of tapping the capital markets appetite for insurance-linked returns.
In essence, these transactions provide a source of fully collateralized excess of loss reinsurance protection to Radian Guaranty and with this second transaction mortgage ILS are set to become an increasingly large component of the firms reinsurance tower.
In its last transaction, Radian Guaranty tested the traditional reinsurance and ILS markets appetite for the deal, saying that the resulting structure offered it the flexibility it needed to engage both reinsurance and capital markets regularly in future.
It’s possible that the reinsurer may again have brought traditional reinsurance alongside this new Eagle Re 2019 deal, but at this time we cannot confirm it.
The four tranches of notes Eagle Re 2019-1 Ltd. will issue are split as $107 million Class M-1A, $176.64 million Class M-1B, $235.52 million Class M-2 and $$42.822 million Class B-1 notes which are the riskiest tranche.
Morningstar has rated them as: Classes M-1A – BBB+; M-1B – BBB-; M-2 – BB-; B-1 – B+.
The lower layer of the tower will be retained by Radian Guaranty, with the coverage kicking in at 2.5% of losses across the covered over $10.71 billion of mortgage insurance portfolio risk.
Subsequently each layer of notes will erode upwards from the riskiest Class B-1 notes as losses eat through the related mortgage reinsurance layers of excess-of-loss protection.
Rating agency Morningstar had the following to say on the quality of loans the mortgage insurance covered involves, “The overwhelming 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, or GSEs, which generally have tight acquisition guidelines and origination processes and produce a homogenous reference pool. The historical performance on these loans and other similar agency loans has been strong. As of the cutoff date, the loans in the pool have never been reported to the ceding insurer as being more than 60-days delinquent, according to the ceding insurer. No mortgage loan has ever been modified as of the cutoff date. None of the loans are interest-only, and all loans have full documentation.”
It’s worth noting thought that the average seasoning of the mortgage loans is relatively low, at just 5 months. This is the second lowest seen in a mortgage ILS deal, after Arch’s last Bellemeade Re.
We understand this mortgage ILS deal is set for completion this week, after which Radian Guaranty will have close to $1 billion of reinsurance protection provided by the capital markets through ILS structures exposed to losses on its mortgage insurance portfolio.
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