Arch in largest mortgage insurance ILS yet, a $368m Bellemeade Re 2017-1

Bermudian insurance and reinsurance specialist Arch Capital Group Ltd. has returned to the capital markets for a third and largest yet in the series of the Bellemeade mortgage insurance-linked securities (ILS) transactions, sponsoring a $368 million Bellemeade Re 2017-1 Ltd. deal.

Arch Capital acquired AIG’s United Guaranty mortgage insurance arm, which had sponsored two previous Bellemeade mortgage ILS transactions, an almost $300 million Bellemeade Re Ltd. (Series 2015-1) and a similarly sized Bellemeade Re II Ltd. (Series 2016-1).

The deals saw the mortgage insurer looking to the capital markets to augment its reinsurance protection for its mortgage insurance book, in a collateralized transaction similar to a catastrophe bond or other insurance-linked security.

Following its acquisition of United Guaranty, Arch Capital said that it would continue the Bellemeade mortgage insurance ILS series of deals and that it would likely issue another takedown, or two, to further protect its 2017 mortgage book.

The re/insurer has been true to its word and late yesterday revealed the completion of its latest mortgage insurance ILS, which is the biggest yet and its first.

For this transaction Arch has registered a new Bermuda domiciled special purpose insurer (SPI) Bellemeade Re 2017-1 Ltd.

Bellemeade Re 2017-1 issued three classes of notes which were sold to investors in order to collateralized the underlying reinsurance agreements with the firm. The notes have ten-year terms.

The $368 million of reinsurance provided by this Bellemeade Re 2017-1 mortgage insurance ILS is on an indemnity trigger basis and covers a portfolio of mortgage insurance policies issued by Arch between January and June of 2017.

Previous Bellemeade ILS deals have covered legacy books of mortgage insurance business for United Guaranty, but with this new deal Arch is reinsuring its most recently underwritten portfolio.

As an indemnity reinsurance transaction, any losses borne by the capital markets investors in the Bellemeade Re 2017-1 notes will be tied to the amount of mortgage insurance losses suffered by Arch on its 2017 mortgage insurance portfolio.

Andrew Rippert, CEO of Arch’s Global Mortgage Group, commented on the deal, “Transactions like this provide us with valuable feedback from third parties on the risk and capital management aspects of our business.” Mr. Rippert added, “This ILS transaction demonstrates our commitment to building a sustainable mortgage guaranty business model that can last through multiple housing cycles and positions Arch as the industry leader in proactively managing residential mortgage credit risk.”

This is Arch’s first ever use of ILS to securitise risks from its portfolio. The company has never been listed before in our Deal Directory for a property catastrophe bond and while it does access the capital markets for retrocession and sharing risks with ILS investors, this marks the first time it has accessed the capital markets for a risk transfer involving a mortgage insurance portfolio and the first full cat bond style issuance from the firm.

It’s also the first time that any mortgage insurance-linked security has received a rating and the senior M-1 tranches notes have been rated BBB by Morningstar. That’s also the first time we’ve seen Morningstar rate any ILS transaction.

It’s encouraging to see Arch continuing the series of Bellemeade mortgage insurance ILS deals, since it acquired United Guaranty. These transactions offer a way of tapping the capital markets for fully collateralized reinsurance protection for its mortgage insurance book, which is an effective way to lock in multi-year protection while also providing a useful way to test reinsurance market appetite and pricing as well.

Further details on the transaction remain scarce at this time, but we have added the $368 million Bellemeade Re 2017-1 Ltd. mortgage insurance ILS transaction to our Deal Directory, where you can also read about every other ILS and cat bond transaction.