U.S. mortgage insurer Radian Guaranty, part of the Radian Group, has returned to the capital markets for another slice of mortgage reinsurance from a securitized catastrophe bond like structure, with a $488.4 million Eagle Re 2020-1 Ltd. transaction.
It’s Radian Guaranty’s third venture into the insurance-linked securities (ILS) market for mortgage reinsurance, as the company pursues the use of efficient capital and securitized risk transfer to back its growing mortgage insurance business.
Radian Guaranty’s first mortgage ILS, or mortgage insurance-linked notes (ILN) transaction, was the $434 million Eagle Re 2018-1 Ltd. transaction issued during the fourth-quarter of 2018.
The insurer followed that up with a larger transaction in the second quarter of 2019, sponsoring a $562 million Eagle Re 2019-1 Ltd. deal.
Now, Radian is back, looking to expand again on its capital markets backed sources of reinsurance and tap investor appetite for mortgage insurance-linked notes, with a multi-tranche Eagle Re 2020-1 transaction that will provide it with cover across a pool of mortgage insurance policies from loans underwritten largely during the last year.
The almost $488.4 million of mortgage insurance-linked notes issued by Eagle Re 2020-1 will be exposed to the risk of rising losses suffered by Radian from claims on the underlying pool of mortgage insurance policies.
The pool of insured mortgage loans is made up of 156,065 loans, amounting to roughly $40 billion in terms of their outstanding balance, of which Radian has guaranteed some $9.9 billion of outstanding risk in-force.
Each of the loans have been originated on or after October 2018 and the related mortgage insurance policies became effective as of January 2019 or after.
The issuer Eagle Re 2020-1 Ltd. will enter into the reinsurance Agreement with the ceding insurer and some five tranches of notes will be issued and sold to investors, with the resulting collateral used to fund and collateralize the mortgage reinsurance agreements for Radian Guaranty, like any other catastrophe bond or ILS structure.
Radian will make premium payments related to the underlying insured mortgage loans to Eagle Re 2020-1, which will in turn pay interest to investors.
Given the exposure to mortgage insurance claims and the fact 10% of the mortgage loan pool is in California, these mortgage ILS transactions do come with catastrophe risks attached, as a major earthquake in the state could result in significant mortgage loan defaults and where covered insurance claims.
With its third mortgage ILS transaction Radian Guaranty is seeking to cover a greater proportion of the in-force risk attached to the loans, with the pool also averaging higher-value and greater GSE level eligibility.
The five tranches of notes will have ten-year maturities and amortise down over time.
The transaction is split into the following tranches, all rated by DBRS Morningstar:
– $83.9 million Class M-1A rated at BBB (low) (sf), priced at 6.15%
– $133.2 million Class M-1B rated at BB (high) (sf), priced at 4.8%
– $88.8 million Class M-1C rated at BB (low) (sf), priced at 3.9%
– $157.9 million Class M-2 rated at B (low) (sf), priced at 2.3%
– $24.7 million Class B-1 rated at B (low) (sf), priced at 2.05%
Each tranche corresponds to different risk levels covering the reference pool or mortgage insurance policies and they will begin to erode from the bottom-up after Radian Guaranty’s retained losses are used up.
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.
The use of capital markets backed reinsurance capacity for covering pools of mortgage insurance policies is becoming an increasing trend.
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 many large institutional investors that also invest in what we’d normally see in the catastrophe bond and ILS market.
As they use a typical ILS or catastrophe bond structure, they represent another interesting example of tapping the capital markets appetite for insurance-linked returns.
These transactions provide a source of fully collateralized excess of loss reinsurance protection to sponsors such as Radian Guaranty and with this third transaction now marketing, it seems mortgage ILS will become an increasingly large component of the Radian reinsurance tower.
We understand this mortgage ILS deal is set for completion in February, after which Radian Guaranty will have sponsored more well over $1 billion of mortgage ILS notes for reinsurance protection provided by the capital markets, using ILS structures exposed to losses on its mortgage insurance portfolio.