Mortgage insurers use of ILS deemed ratings positive by Moody’s

Ratings agency Moody’s Investors Service has highlighted the use of insurance-linked securities (ILS) structures as a way to secure mortgage reinsurance capacity from the capital markets as beneficial to mortgage insurers strategies.

The ratings agency has adjusted its opinion on a number of the leading U.S. mortgage insurance companies, upgrading some and revising outlooks to positive for others.

While not all of these U.S. mortgage insurers have sponsored an insurance-linked securities (ILS) arrangement as yet, the fact the capital markets are now open as a source of efficient mortgage reinsurance capacity has given Moody’s greater confidence in the sector it seems.

Mortgage insurers have been tapping the capital markets for reinsurance capacity since 2015, when United Guaranty (an AIG subsidiary at the time) issued the first securitization of mortgage insurance risk using a special purpose vehicle and syndicated notes structure akin to a catastrophe bond.

Since that first issuance, we’ve now recorded twenty mortgage ILS (or mortgage insurance linked notes) issues which together have brought a total of over $8.4 billion of mortgage risk capital to investors.

Details of every single mortgage ILS transaction can be found in our Deal Directory here.

Of the $8.4 billion of mortgage risk issued to capital market investors using an ILS structure, more than half has been sponsored by entities owned by Bermuda based insurance and reinsurance firm Arch Capital Group.

Moody’s affirmed the ratings of Arch’s mortgage insurance subsidiaries and has revised its outlook to positive, having previously been stable.

Explaining this, Moody’s said, “With more than $8.4 billion of ILNs sponsored by US mortgage insurers since mid-2015, Moody’s expects that this significant source of off-balance sheet risk transfer capacity will dampen the earnings and capital volatility that have historically impacted the sector during adverse economic environments, allowing mortgage insurers with comprehensive reinsurance coverage to maintain an adequate capital cushion to the GSEs’ Private Mortgage Insurer Eligibility Requirements (PMIERs) in the case of an economic downturn.

“Arch Mortgage’s positive outlook also reflects the firm’s leadership position in the mortgage insurance market and its strong capital adequacy, bolstered by its substantial use of reinsurance to mitigate underwriting volatility in stress scenarios. Arch Mortgage has transferred more than $4.7 billion of risk to the capital markets through 10 Bellemeade Re ILN transactions including its recently announced Bellemeade Re 2019-4 transaction. The group also has additional risk transfer protection through traditional quota-share and excess of loss reinsurance. Through these arrangements, Arch Mortgage has significant off-balance sheet capital resources to absorb losses during periods of elevated mortgage credit losses.”

Moody’s also upgraded U.S. mortgage insurer Radian’s ratings.

Commenting on Radian, which has also sponsored insurance-linked securities (ILS), Moody’s said, “Since November 2018, Radian has transferred nearly $1 billion of risk to the capital markets through two Eagle Re ILN transactions, and has also sourced additional risk transfer protection through excess of loss and quota-share coverage in the traditional reinsurance market. Through these arrangements, Radian has reinsurance covering nearly all of its business written during 2017 and 2018, providing significant capital resources to absorb losses during periods of elevated mortgage credit losses.”

Adding, “However, assuming Radian systematically uses ILNs to reinsure new business going forward, it will take time for Radian to have comprehensive reinsurance coverage on the substantial majority of its risk in force.”

Moody’s is clearly very positive on the way U.S. mortgage insurers have bolstered their business models with the use of ILS transactions and the reinsurance they provide.

The rating agency also seems to feel that their use will continue, as with the capital markets open to mortgage risk these insurers would be foolish not to capitalise on the increased availability of reinsurance capacity this new conduit provides.

Moody’s also upgraded insurer MGIC’s ratings and said, “Since October 2018, MGIC has transferred nearly $635 million of risk to the capital markets through two Home Re ILN transactions, and has also sourced additional risk transfer protection through quota-share coverage in the traditional reinsurance market. Through these arrangements, MGIC has reinsurance covering nearly all of its business written during 2017 and 2018, providing significant capital resources to absorb losses during periods of elevated mortgage credit losses.”

The rating agency also highlighted that it will take MGIC time to issue sufficient insurance-linked securities (ILS) to cover the majority of its book of mortgage insurance business with reinsurance from the capital markets.

NMIC also got its ratings upgraded, while Moody’s said about this insurer, “Since Q2 2017, NMIC has transferred more than $800 million of risk to the capital markets through three Oaktown Re insurance-linked note (ILN) transactions, and has additional risk transfer protection through traditional quota-share reinsurance. Through these arrangements, NMIC has reinsurance covering the substantial majority of its outstanding insured exposures, providing significant off-balance sheet capital resources to absorb losses during periods of elevated mortgage credit losses.”

In addition, mortgage insurer Essent also got an upgrade and Moody’s said, “Since March 2018, Essent has transferred more than $1.2 billion of risk to the capital markets through 3 Radnor Re ILN transactions, and has sourced additional risk transfer protection through excess of loss reinsurance in the traditional market. Through these arrangements, Essent has reinsurance covering the substantial majority of its outstanding insured exposures, providing significant off-balance sheet capital resources to absorb losses during periods of elevated mortgage credit losses.”

Finally, Moody’s also affirmed Genworth’s ratings on its mortgage insurance subsidiaries and changed its outlook on them from stable to positive.

Now, Genworth has not yet sponsored any mortgage ILS but Moody’s still mentions their availability as a positive to this insurer as well.

“GMICO has sourced risk transfer protection through excess of loss coverage in the traditional reinsurance market. Through these arrangements, GMICO has reinsurance covering a majority of all its business written during 2016, 2017 and 2018, providing significant capital resources to absorb losses during periods of elevated mortgage credit losses. However, the company has not entered into a ILN transaction with the capital markets at this time,” Moody’s explained.

But also highlighted that, “Assuming GMICO systematically uses ILNs to reinsure new business going forward, it will take time for the company to have comprehensive reinsurance coverage on a substantial majority of its risk in force.”

Clearly the rating agency is extremely positive on the development of a capital market for mortgage insurance risk and the added reinsurance capacity this is now providing for insurers.

It suggests that insurers will continue to tap the capital markets at pace and this market will continue to expand as a result.

Details of every mortgage insurance-linked notes issuance can be found here in our Deal Directory.