AIG in $298.6m Bellemeade Re II legacy mortgage insurance ILS

Global insurer AIG has secured almost $300m of collateralized reinsurance from capital market investors for the legacy mortgage insurance portfolio of its United Guaranty subsidiary, in a Bellemeade Re II Ltd. (Series 2016-1) insurance-linked securities (ILS) transaction.

It’s the second mortgage insurance ILS issuance from AIG’s United Guaranty, as the insurer looks to new sources of reinsurance capital to lay off exposures from its portfolio.

AIG’s July 2015 $298.89m Bellemeade Re Ltd. (Series 2015-1) mortgage insurance ILS was the first such transaction to use the ILS and catastrophe bond securitisation structure as a mechanism for securing reinsurance from the capital markets.

This second transaction, issued through new Bermuda domiciled special purpose insurer (SPI) Bellemeade Re II Ltd., features risks from United Guaranty’s pre-2008 mortgage insurance portfolio, making it the first legacy mortgage insurance ILS transaction.

AIG said that the deal saw its mortgage insurance subsidiary United Guaranty Corporation (UGC) secure $298.6m of indemnity reinsurance protection from Bellemeade Re II for a portfolio of mortgage insurance (MI) policies issued in 2008 and prior years.

Three classes of notes have been issued and listed on the Bermuda Stock Exchange (BSX), with the proceeds from the sale of the notes used to collateralize Bellemeade Re II’s reinsurance obligations with the insurer.

The three classes of amortizing notes all have final maturities set in 10-years time, providing United Guaranty with a source of fully collateralized indemnity reinsurance cover for potential losses on a portion of its legacy (2008 and earlier) first-lien U.S. mortgage insurance policies.

United Guaranty President and CEO Donna DeMaio commented on the completion of the transaction; “We believe this marks the first time a mortgage insurer has accessed the capital markets for a risk transfer involving a mortgage insurance portfolio made up of policies issued in 2008 and earlier years.”

The three tranches of Series 2016-1 notes issued by Bellemeade Re II consist of $16.6m Class B-1, a $107.8m Class M-2A and $174.2m Class M-2B offerings. No details of different attachment points or other factors are currently available, but it’s safe to assume each class of notes cover a different risk layer for United Guaranty.

The three classes of notes will have provided ILS and other capital market investors with a variety of potential returns, dependent on risk levels, likely helping to generate interest in the deal from a more diverse group of backers.

“The transaction not only helps United Guaranty manage risk, but also demonstrates that investors are willing to assign value to this type of portfolio from the 2008 and earlier period,” DeMaio explained.

It’s interesting to see AIG now with around $600m of ILS and capital market investor backed reinsurance for its mortgage insurance risks, particularly legacy, as it could stimulate other mortgage insurers to look to ILS as a potential solution to reduce their liabilities for both recent and older mortgage related insurance policies.

We’ve added the $298.6m Bellemeade Re II Ltd. (Series 2016-1) legacy mortgage insurance ILS transaction to our catastrophe bond and ILS Deal Directory.