Radian Group is back in the capital markets in search of more collateralized mortgage reinsurance for its Radian Guaranty subsidiary, with a $484 million target for an Eagle Re 2021-2 Ltd. issuance of mortgage insurance-linked securities (ILS).
This new mortgage insurance-linked notes transaction will be Radian Guaranty’s sixth and if successful it will mean the mortgage insurer will have secured almost $2.9 billion of multi-year excess-of-loss mortgage reinsurance protection from the capital markets through its Eagle Re series of deals.
For its second issuance of mortgage insurance-linked notes in 2021, Radian has established a new Bermuda based special purpose insurer, Eagle Re 2021-2 Ltd. (EMIR 2021-2), through which five main tranches of mortgage ILS securities will be issued.
The resulting notes, of which there are expected to be around $484 million, will be offered for sale to capital market investors. Each tranche of notes have now been priced and the offering settles in just over one-week.
The proceeds from their sale will be used to collateralize mortgage reinsurance agreements between Eagle Re 2021-2 and Radian Guaranty, providing the insurer with a source of excess-of-loss mortgage reinsurance protection across a number of attachment levels, covering it against an unexpected or significant rise in mortgage insurance claims.
As with other mortgage ILS deals, one of the tranches offered may be converted into three separate coverage layers of notes after the issuance completes, while an additional layer may be issued to increase the size of the offering, if investor appetite is sufficient.
Mortgage ILS deals have become more complex this year, as sponsors have found new ways to tier their reinsurance coverage using securitization technology, while also satisfying the risk appetites of different investors.
The transaction breaks down as follows, with the indentation showing the M-1C layer that may be split equally across three coverage levels:
- $118.3 million Class M-1A, priced at one-month SOFR plus 155 basis points (DBRS Morningstar: BBB (high) (sf); Moody’s: Baa1 (sf))
- $102.2 million Class M-1B, priced at one-month SOFR plus 205 basis points (DBRS Morningstar: BBB (low) (sf); Moody’s: Baa3 (sf) )
- $145.2 million Class M-1C, priced at one-month SOFR plus 345 basis points (DBRS Morningstar: BB (sf); Moody’s: Ba2 (sf))
- $48.4 million Class M-1C-1 (DBRS Morningstar: BB (high) (sf); Moody’s: Ba1 (sf))
- $48.4 million Class M-1C-2 (DBRS Morningstar: BB (high) (sf); Moody’s: Ba2 (sf))
- $48.4 million Class M-1C-3 (DBRS Morningstar: BB (sf); Moody’s: Ba3 (sf))
- $91.4 million Class M-2, priced at one-month SOFR plus 425 basis points (DBRS Morningstar: B (high) (sf); Moody’s: B2 (sf))
- $26.9 million Class B-1, priced at one-month SOFR plus 500 basis points (DBRS Morningstar: B (sf))
Rating agency DBRS Morningstar explained the risk profile of this new mortgage ILS, “The Notes are exposed to the risk arising from losses 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 153,373 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 less than or equal to 97%, have never been reported to the Ceding Insurer as 60 or more days delinquent, and have never been reported to be in a payment forbearance plan as of the cut-off date. The mortgage loans have MI policies effective on or after August 2020 and on or before July 2021.”
Once the notes are issued, Eagle Re 2021-2 will enter into the excess-of-loss mortgage reinsurance arrangements with Radian, which will run across and amortize over a 12.5-year term.
The market for mortgage insurance-linked securities (ILS) continues to be buoyant and investor interest in this segment continues to expand as well.
Capital markets backed reinsurance funding, secured through mortgage ILS deals like the Eagle Re series, has become an important lever for the US mortgage insurance market, helping it expand while protecting insurer PML’s and, importantly, as Radian has said before, providing access to a capacity source that helps ultimately lower its own cost-of-capital.