U.S. mortgage insurer Radian Guaranty, part of the Radian Group, is back in the capital markets with its first mortgage insurance-linked securities (ILS) issuance since the COVID-19 pandemic outbreak, as it seeks $390.3 million of collateralised reinsurance through an Eagle Re 2020-2 Ltd. transaction.
It’s Radian’s fourth mortgage ILS deal in total and signals the capital markets being well and truly reopened to mortgage insurance credit risks, albeit for mortgage ILS transaction featuring insurance portfolios linked to higher quality mortgage loans than some pre-COVID deals.
In this latest mortgage ILS deal from Radian, the pool of subject mortgages are 100% current, with zero in default, delinquency or forbearance as of the cut off date of August 31st 2020.
That’s important, as capital markets investors had been spooked by first the volatility created by the pandemic and then the escalating delinquency rates on mortgage loans, which had at one point locked up the mortgage ILS market completely.
Coming back with transactions featuring higher-quality portfolios of risk, has enabled sponsors to reopen the market and regain the confidence of the third-party investors funding their reinsurance through these issuances of mortgage insurance linked notes (ILN).
For this latest mortgage ILS deal, Radian has established a new Bermuda domiciled special purpose insurer (SPI) called Eagle Re 2020-2 Ltd.
Eagle Re 2020-2 will seek to issue 8 tranches of mortgage insurance-linked notes, that will be sold to capital market investors and the proceeds used to collateralise and fund underlying excess of loss reinsurance agreements between the SPI and Radian Guaranty.
Each tranche of notes corresponds to different levels of risk within the subject mortgage insurance portfolio, providing Radian with layered reinsurance that would attach as delinquencies or defaults moved through its tower.
The targeted just under $390.3 million of reinsurance coverage breaks down across tranches of mortgage ILS notes as follows, each with their corresponding preliminary rating from DBRS Morningstar / Moody’s:
— $130.1 million Class M-1A at BB (high) (sf) / Baa3 (sf)
— $65.1 million Class M-1B at BB (sf) / Ba1 (sf)
— $65.1 million Class M-1C at BB (low) (sf) / Ba2 (sf)
— $97.6 million Class M-2 at B (sf) / Ba3 (sf)
——— $32.5 million Class M-2A at B (high) (sf) / Ba2 (sf)
——— $32.5 million Class M-2B at B (high) (sf) / Ba3 (sf)
——— $32.5 million Class M-2C at B (sf) / B1 (sf)
— $32.5 million Class B-1 at B (sf) / B1 (sf)
U.S. mortgage insurers have adjusted since the pandemic to offer mortgage ILS notes that generally sit a little further along the risk curve, compared to pre-COVID mortgage ILS deals, which has helped them to maintain support from the capital markets.
The addition of capital markets backed reinsurance funding through these mortgage ILS deals has become a key lever for the mortgage insurers, helping them to grow their businesses while protecting PML’s and as Radian has said before, benefiting from access to capacity that helps it to lower its own cost-of-capital.