MGIC seeks $290m of mortgage reinsurance with Home Re 2023-1 ILS deal

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MGIC Investment Corporation has returned to the capital markets to seek its first issuance of mortgage insurance-linked notes in more than one year, targeting $290 million or more in mortgage reinsurance from this Home Re 2023-1 Ltd. mortgage insurance-linked securities (ILS) transaction.

This is now the seventh time MGIC has looked to tap into capital market investor appetite to secure reinsurance for its Mortgage Guaranty Insurance Corporation unit through a Home Re mortgage ILS issuance.

The company had consistently used the catastrophe bond-like structure to secure mortgage reinsurance from capital market investors between 2018 and 2022 and now after roughly a year and a half away, MGIC is back to add more mortgage ILS protection to its business.

The company has established Home Re 2023-1 Ltd. in Bermuda to be registered as a special purpose insurer (SPI) for the issuance of insurance-linked securities (ILS) linked to mortgage insurance risk.

Aon Insurance Managers (Bermuda) Ltd. is managing the vehicle for the sponsor.

In total, across four tranches of notes being offered, MGIC is seeking at least $290 million of mortgage reinsurance for its Mortgage Guaranty Insurance Corporation unit.

The four classes of notes being issued by Home Re 2023-1 Ltd. will all be backed by reinsurance premiums, eligible investments, and related account investment earnings, with each tranche corresponding to a pool of mortgage insurance policies linked to residential loans.

The notes are exposed to the risk of losses the ceding insurer pays to settle claims on the underlying mortgage insurance policies, hence they are truly an insurance-linked security (ILS), although covering credit risk and so these tend to appeal to a different set of investors than the cat bond community.

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The covered pool of insured mortgage loans is made up of 202,154 fully amortizing first-lien fixed- and variable-rate mortgages, all underwritten to a full documentation standard and never been reported as 60 or more days delinquent, while none of the loans are reported to be in an active payment forbearance plan.

The mortgage insurance policies have all been activated on or after June 2022 and on or before August 2023.

Details of the tranches of notes being issued, which all have a 10-year term, and their DBRS Morningstar ratings can be seen below:

$50.3 million Class M-1A at BBB (low) (sf)
$127.6 million Class M-1B at BB (sf)
$92.8 million Class M-2 at B (high) (sf)
$19.3 million Class B-1 at B (sf)

At closing of the Home Re 2023-1 issuance, the SPI will enter into a reinsurance agreement with the ceding insurer, MGIC, with the ceding insurer then receiving reinsurance protection for the funded portion of the mortgage insurance losses.

MGIC will make premium payments related to the underlying insured mortgage loans to the issuer and the proceeds from the sale of the notes will be used to purchase eligible investments that will be held in the reinsurance trust account, much like any ILS transaction.

This Home Re 2023-1 mortgage ILS transaction will transfer the credit risk associated with mortgage insurance policies on a defined portfolio of mortgages to the capital markets for MGIC.

The sponsor will bear a first loss layer sitting beneath these tranches, after which the notes would take losses in order of priority.

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You can read all about the Home Re 2023-1 Ltd. mortgage insurance-linked securities transaction and every other mortgage ILS deal in our specific directory of mortgage ILS deals, as well as in our all-encompassing Artemis Deal Directory.

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