Mortgage insurance-linked securities upgraded on improving fundamentals

A number of mortgage insurance-linked securities, or mortgage insurance-linked notes, transactions have had their credit ratings upgraded, as the fundamentals related to them improved on faster pay-downs have helped to build up credit enhancement associated with them.

The mortgage insurance-linked securities (ILS) market has been very quiet through 2022 and into 2023, with only close to $1.2 billion issued across four deals last year and nothing so far in 2023, down significantly from 2021’s bumper nearly $6.3 billion of issuance.

A range of factors have resulted in the slow-down of this part of the ILS market.

Access to reinsurance remains key for US mortgage insurers, but the market fundamentals and macro environment have made accessing the capital markets for mortgage reinsurance far more challenging of late.

But, outstanding mortgage ILS deals remain in-force and continue to amortise down, with these remaining attractive investments for some allocators and now the risk profile of the notes is improving, driving credit rating upgrades.

Moody’s has upgraded notes associated with two specific mortgage ILS transactions, Oaktown Re V Ltd. from National Mortgage Insurance Corporation and Triangle Re 2020-1 Ltd. from Genworth Mortgage Insurance.

For the Oaktown Re V Ltd. mortgage ILS deal, the Class B-1 notes have been upgraded to Ba2 (sf), while Class M-2 has been upgraded to Baa2 (sf).

For the Triangle Re 2020-1 Ltd. mortgage ILS deal, the Class B-1 notes have been upgraded to Baa2 (sf), while the Class M-2 have been upgraded to Baa1 (sf).

Moody’s explained that these, “Upgrade actions are primarily driven by the increased levels of credit enhancement available to the bonds and the decreased level of expected losses. The prepayments and the sequential pay structure have benefited the bonds by paying down bonds and building up credit enhancement.”

As credit enhancement improves, these notes can become increasingly attractive to certain types of investors and this may help to encourage more investors to look at mortgage insurance-linked assets, which in time could help to reopen the market.

You can analyse details of every mortgage ILS transaction in our Deal Directory and analyse mortgage ILS issuance in our charts.