A number of mortgage insurance-linked securities (ILS) issuances have had their ratings upgraded, as Moody’s noted improved credit enhancement and reduced projected losses across a series of the deals.
The first to come to light, were four tranches of notes issued as part of Mortgage Guaranty Insurance Corporation’s $399 million Home Re 2021-1 Ltd. mortgage insurance-linked securities (ILS) issuance have had their rating upgraded, as Moody’s noted improved credit enhancement and reduced projected losses.
The transaction is MGIC Investment Corporation’s largest mortgage ILS, or mortgage insurance-linked notes, issuance to-date and the $399 million of notes were sold to capital market investors and the proceeds used to collateralize reinsurance agreements between Home Re 2021-1 and Mortgage Guaranty Insurance Corporation.
This secured MGIC a multi-year source of capital markets backed reinsurance capacity, by tapping into investor appetite for the growing pool of mortgage ILS issuance.
These mortgage ILS deals are exposed to increases in mortgage insurance claims, so effectively they have an indemnity trigger.
As a result they also contain credit risk exposure, to the mortgage holders and the potential for default to trigger an insurance claim, meaning these mortgage ILS are correlated to the economy which means many of the traditional insurance-linked securities (ILS) funds and investors don’t allocate to them.
But, a growing number of more general investors that do allocate to catastrophe bonds for their diversification and return profile, also allocate to these as another example of an insurance-linked return, in fully securitized format, being less concerned about the potential for correlation and classing mortgage ILS deals still as an alternative asset.
Moody’s has upgraded all four classes of notes that it originally rated with this Home Re 2021-1 transaction.
Moody’s said the rating upgrades were, “primarily driven by the increased levels of credit enhancement available to the bonds and the reduction in projected losses.”
Explaining this in more detail, Moody’s said that because of the low interest rate environment, Home Re 2021-1 has experienced high prepayment rates over the last few months.
Prepayment rates were high, while there were no losses against the insured balance-sheet under the reinsurance agreement.
“High prepayments and the sequential pay structures have benefited the bonds by increasing the paydown speed and building up credit enhancement,” Moody’s said.
Low interest rates have made mortgage holders more likely to pay ahead of the typical requirements of their loans, which ultimately serves to reduce the risk of default, or a claim against the mortgage insurance policies covered by a mortgage reinsurance or insurance-linked securities (ILS) arrangement.
As a result, the risk attached to these Home Re 2021-1 notes has effectively reduced somewhat, resulting in the higher ratings being applied.
Since writing this article, Moody’s has also upgraded tranches of notes from mortgage ILS deals sponsored by Arch Capital, Essent Guaranty, Radian Guaranty, National Mortgage Insurance Corporation and Genworth Financial.
The reasoning given was precisely the same, so the improved credit-worthiness of the bonds, thanks to a low-interest rate environment enabling mortgage holders to paydown faster and so improve the outlook for the underlying reinsurance.
Notes from the Bellemeade Re 2021-1 Ltd. sponsored by Arch, the Eagle Re 2021-1 Ltd. sponsored by Radian Guaranty, Oaktown Re VI Ltd. sponsored by NMIC, Radnor Re 2021-1 Ltd. sponsored by Essent Guaranty and Triangle Re 2021-2 Ltd. sponsored by Genworth were all upgraded by similar notches to the MGIC mortgage ILS.
All of these upgraded series of mortgage insurance-linked notes are of a similar vintage. While interest rates are now projected to rise, it is possible some of those mortgage ILS deals issued since could also find their ratings improved if they too have benefited from the same credit effects.
But, with interest rates now forecast to rise over the coming months and rates looking more uncertain for the foreseeable, it’s possible these gains made could dry up and rating improvements may not be something we see further into the future.
You can read about every mortgage insurance-linked securities transaction in our directory of mortgage ILS deals.