The completion of mortgage insurer Essent Guaranty’s first mortgage insurance-linked securities (ILS) transaction is seen as a “significant milestone” for the firm, according to its CEO, as the $424.4 million Radnor Re 2018-1 Ltd. deal helps to diversify the firms risk capital sources.
The Radnor Re 2018-1 mortgage insurance ILS deal will provide Essent Guaranty with a multi-year source of fully-collateralized excess of loss reinsurance cover for an existing portfolio of mortgage insurance policies.
The subject business had all been underwritten with an insurance coverage effective date on or after January 1st 2017, but before January 1st 2018, featuring mortgage insurance risks linked to a pool of $40.55 billion of insured mortgage loans.
The mortgage insurance policy coverage amount totals $9.99 billion and the Radnor Re 2018-1 mortgage ILS notes are exposed to the risk of reinsurance losses on the pool of mortgage insurance risk for Essent Guaranty, Inc., the ceding insurer under the terms of the arrangement.
The obligations under the reinsurance agreements have been funded through the sale of three classes of notes to investors, with the proceeds used to collateralize the reinsurance obligations between Radnor Re 2018-1 and Essent.
The notes have ten-year legal maturities, providing broad coverage to Essent from the capital market investors that participated, which we understand included a number of ILS funds and investors.
Mark Casale, Chairman and Chief Executive Officer of Essent Group Ltd., explained the rationale behind the deal, saying, “This transaction is a significant milestone for our company, as it expands our capital sources while also providing a layer of protection against adverse credit losses.”
“We are very excited to announce the closing of our inaugural credit risk transfer transaction,” he continued, adding that the deal, “Strengthens our mortgage insurance franchise and enhances the role that Essent plays in supporting a strong and robust U.S. housing finance system.”
This mortgage ILS enables Essent to leverage the depth of capacity available from the capital markets and ILS as a way to augment their reinsurance protection for mortgage insurance books, while diversifying their providers of reinsurance capital, all in a fully-collateralized transaction similar to a catastrophe bond.
Therefore Essent has unlocked fully collateralized capital markets backed reinsurance protection and multi-year coverage, in a deal that will also usefully have helped it to test reinsurer appetite and market pricing as well.