As expected, U.S. focused mortgage insurer Essent Guaranty has reported that all of its mortgage insurance-linked securities (ILS) transactions outstanding are now subject to a trigger event, after the Covid-19 pandemic drove delinquency rates much higher.
Essent Guaranty follows three other mortgage insurers that have reported a triggering of their mortgage insurance-linked notes arrangements.
As we reported recently, Radian Guaranty, National Mortgage Insurance Corporation and MGIC Investment Corporation, each of which have visited the capital markets with mortgage ILS issuances a number of times to secures excess-of-loss reinsurance protection for their mortgage insurance portfolios, have all reported a triggering of some of their mortgage ILS transactions.
The private mortgage insurers have been tapping the capital markets using a catastrophe bond or ILS type structure, securing fully collateralised excess-of-loss reinsurance coverage for their portfolios from third-party investors.
The impacts of the Covid-19 pandemic are now becoming clearer across employment in the United States and having a knock-on effect on people’s ability to maintain payments on their mortgages.
In time this was expected to drive higher mortgage insurance claims for the private insurers in the U.S., something that is now becoming abundantly clear.
Essent Guaranty reported a roughly 40% increase in the mortgage loan delinquencies it is dealing with during the month of June, explaining that; “Based on the level of delinquencies reported to us, the insurance-linked note transactions that Essent Guaranty has entered into to date (the “ILNs”) became subject to a “trigger event” as of June 25, 2020. The amortization of principal of the notes issued by the unaffiliated special purpose insurers in connection with the ILNs is suspended during the continuation of a trigger event.”
Essent has sponsored four mortgage ILS transactions under the Radnor Re program, amounting to more than $1.65 billion of risk capital issued and mortgage reinsurance secured from the capital markets.
Other signs of just how serious the mortgage delinquency and default situation is getting in the U.S. continued to emerge from the private mortgage insurance market this week.
NMI Holdings revealed that the number of loans it has in default rose from 2,265 to 10,816 in June, with the default rate escalating from 0.61% at the end of May 2020 to 2.9% by the end of June.
MGIC Investment Corporation also updated on its operations today, saying that its delinquent inventory rose by another 19,358 loans in June, which was a slower rate than the over 30k added in May.
These trends are likely to continue and it is going to be interesting to see whether any principal losses occur to the mortgage ILS deals.
At this stage, it doesn’t appear that there has been any specific loss of principal suffered by investors in the mortgage ILS deals that have been triggered or activated due to the rise in delinquencies, but a triggering event has been announced and so the amortisation of the notes principal is halted while the claims begin to be counted.
As we also reported recently, the mortgage ILS market has now re-opened with Arch Capital managing to get its latest Bellemeade Re deal away, despite ongoing capital market volatility. Arch may have been lucky to get that deal away at all, given the worsening mortgage delinquency and default situation.
One other sponsor of a mortgage ILS deal that has not yet come forwards with a triggering, aside from Arch which has yet to make any such announcements, is Genworth which sponsored its first deal under Triangle Re last November.
But Genworth today said it has secured $300 million of mortgage reinsurance to boost its PMIERs, in an excess of loss reinsurance deal with a panel of reinsurers covering a portion of its subject loans written between 2009 and 2019 book years.
This traditional reinsurance buy is likely a response to the rising delinquencies, a recognition that more PMIERs capital may be required and also likely that the capital markets remains a challenging place to secure mortgage reinsurance from at this time.