ILS acceptance shifted the mortgage risk transfer landscape: Capsicum Re


The insurance-linked securities (ILS) market’s acceptance of mortgage risk served as a shift in the dynamics of the ever-changing mortgage reinsurance sector, with further growth in the space expected outside of the U.S. market, according to reinsurance broker Capsicum Re.

As highlighted by Capsicum Re in a recent note and as shown by the Artemis Deal Directory, mortgage insurance risk now accounts for just under 5% of the total volume of outstanding ILS risk capital, with five transactions composed of 13 tranches of notes totalling over $1.6 billion, with the outstanding market size currently sitting at a huge $34.1 billion.

The first of these transactions to come to market was Bellemeade Re Ltd. (Series 2015-1), a $298.98 million deal sponsored by United Guaranty Corporation, which was then a subsidiary of AIG before being acquired by Arch Capital Group.

In total, four Bellemeade Re transactions have come to market, with the two most recent, being Bellemeade Re 2017-1 and Bellemeade Re 2018-1, being issued under the watch of Arch, while the 2015 and 2016 issuance was completed under the watch of AIG.

In total, the Bellemeade Re series account for just under $966 million of total ILS risk capital outstanding, so the majority of deals that provide protection against mortgage insurance risks.

The other mortgage insurance transactions are the $211.32 million deal from National Mortgage Insurance Corporation, Oaktown Re Ltd. (Series 2017-1), and the $424.412 million transaction from Essent Guaranty, Radnor Re 2018-1 Ltd.

According to Freddie Scarratt, a mortgage risk analyst at Capsicum Re, the ILS market’s acceptance of mortgage insurance risk in 2015 with the first Bellemeade Re transaction – which was the first post-2008 financial crisis collateralized reinsurance transaction that involved securitising the risk and the sale of notes to investors – was a shift in the world of mortgage reinsurance and risk transfer.

For the sponsor, these transactions provide an efficient way to access the capital markets for fully collateralized reinsurance protection for a mortgage insurance book, enabling the security of multi-year protection while also providing companies with a means to test reinsurance market appetite and pricing, while diversifying its sources of protection.

“Looking forward, it is difficult to predict how the next adaptation in mortgage reinsurance transactions will manifest itself. However, it is clear that it won’t be restricted geographically to the US, but will expand worldwide as the stimuli to which the market must respond will be plentiful. So too will the opportunities following the robust resurgence of the class over the past few years,” said Scarratt.

The growth of mortgage insurance risk in the ILS space since the first deal in 2015 underlines the willingness of the investor base to assume the risks, as does the fact some of the tranches upsized while marketing.

And with the mortgage reinsurance sector as a whole expected to expand, driven by the participation of the ILS space as well as credit risk transfer programmes and other developments such as Freddie Mac’s IMAGIN programme, it’s possible that the ILS community will continue to play an increasing role, as is the case in the broader reinsurance sector.

“In an era of extensive mortgage regulation following the financial crisis of 2008, mortgage indemnity risk has never been more rigorously underwritten, and unlike other specialty classes, there are decades’ worth of public data available to model today’s risk.

“Therefore, in this re-emerging class the scope of change is limited only by the capacity on offer and the innovative solutions we create,” said Scarratt.

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