The issuance of mortgage insurance-linked securities (ILS) transactions appears to be gaining traction after a muted 18 months, as major US mortgage insurers turn to the capital markets for reinsurance protection.
Data from Artemis, our ILS-focused sister site, reveals that mortgage ILS issuance hit an annual high of roughly $6.3 billion in 2021 as 14 deals came to market, the most seen in a single year since the inaugural deal in 2015.
Between the start of 2015 and the end of 2021, both the number of deals and the value of these was on an upward trajectory. However, the start of 2022 was notably slow, and by the end of September issuance ground to a halt on the back of capital markets volatility and other macro factors that ultimately increased investors cost of capital.
Additionally, the effects of pandemic-related mortgage delinquencies were becoming clearer and there were some nerves over this market, while at the same time investors were demanding higher spreads.
Now, though, spreads are normalising somewhat, although are still elevated over prior years, but have come down to a level for the market to reopen in a more meaningful way.
The Artemis Deal Directory, which contains the majority of catastrophe bond and related ILS transactions issued since the market’s inception in the mid-1990’s, shows that while just two mortgage deals have been issued so far this year, with a combined value of $635 million, there’s another two in the pipeline scheduled to close this month, adding a further $477 million to 2023 issuance.
History shows that during the active years for mortgage ILS issuance, the fourth quarter has been particularly busy, so it’s possible that more deals feature before year-end.
As the largest US mortgage insurers again tap capital market investor appetite for mortgage insurance risk to source reinsurance protection, it will be interesting to see if this form of mortgage reinsurance continues to be utilised in 2024, and whether it can get back to the levels seen between 2019 and 2021.
The fact deals have priced more competitively and also upsized, is helping to build sponsor interest, as the spread to pay for capital markets backed mortgage reinsurance is perceived to have fallen.
Artemis’ data shows that Arch Capital Group is the most prolific sponsor of mortgage ILS transactions, having secured almost $8.5 billion of mortgage reinsurance from the capital markets from 19 deals. Essent Guaranty is next on the list with total issuance of more than $3.6 billion from nine deals, followed by Radian Guaranty at $3.2 billion from seven transactions.
Other sponsors of mortgage ILS transactions include MGIC Investment Corporation, National Mortgage Insurance Corporation, and Genworth Mortgage Insurance.
