Bellemeade Re Ltd. (Series 2015-1)

The Bellemeade Re Ltd. transaction, which listed on the Bermuda Stock Exchange (BSX) on the 29th July, is essentially an ILS or capital markets based reinsurance securitization deal, not a mortgage loan securitization like those that gained such a tainted profile during the financial crisis.

It is not securitizing mortgage loans or credit risk, as has been reported elsewhere in the financial press, rather it provides reinsurance protection to AIG subsidiary United Guaranty Corporation for the risk of seeing a dramatic increase in mortgage insurance payouts.

The deal does mean that United Guaranty has transferred risks that are ultimately linked to the default rates on the mortgage loans it provides, of course, as the insurance policies pay out when a borrower defaults or cannot make a repayment.

United Guaranty, ultimately the cedent or sponsor here, largely provides mortgage insurance to borrowers who do not have large deposits to put down on homes, hence some of the mortgage population in the U.S. that could be considered higher risk, or less prime.

As a result, with a large portfolio of insurance policies that pay out when homeowners default on mortgage payments or miss payments and make a claim on their mortgage insurance, United Guaranty and AIG need reinsurance capacity for that exposure.

Bellemeade Re Ltd. is a Bermuda domiciled special purpose insurance (SPI) vehicle that was registered in June, designed to facilitate a collateralized reinsurance transaction for United Guaranty and AIG, through the securitization of the risk and sale of notes to investors.

Bellemeade Re entered into a reinsurance agreement with United Guaranty, which will see it assume the mortgage insurance loss risks associated with an insurance portfolio for mortgage loans amounting to around $32.4 billion.

The reinsurance protection that Bellemeade Re provides to United Guaranty is on an aggregate basis.

Bellemeade Re has issued and sold $298.89m of Series 2015-1 insurance-linked notes to investors, transferring the risk of mortgage insurance losses on to them and receiving collateralized reinsurance protection in return. The notes are said to cover a percentage of losses within layers of the mortgage insurance portfolio.

It’s important to understand that it’s the risk of AIG subsidiary United Guaranty suffering mortgage insurance losses, above a specified attachment level, associated with these loans that is being reinsured and transferred, not the loans themselves or loan repayment risks.

As the Bellemeade Re structure is a typical ILS, effectively the same as a property catastrophe bond, the Bellemeade Re notes feature a trigger. The deal has been structured as an indemnity bond, with three different payout levels and three tranches of notes issued.

All three tranches of notes have a 10 year term, with a 5 year call option. Final maturity is scheduled for the 25th July 2025.

This Series 2015-1 issuance from Bellemeade Re Ltd. involved the issuance of a $14.429m Class B-1 tranche, a $140.168m Class M-1 tranche and a $144.291m Class M-2 tranche of notes.

In terms of pricing, the notes pay a spread above 1 month Libor. The Class B-1 notes are the riskier and pay 6.3%, Class M-1 pays 2.5%, making them the least risky and Class M-2 pay 4.3%.

Investors are taking on the risk that United Guaranty suffers mortgage insurance losses above a certain level during each risk period. At this time we don’t have any details on the attachment levels or the probabilities of attachment and expected losses associated with the notes.

So this is an indemnity reinsurance transaction, with any losses to be borne by the capital markets investors in the Bellemeade Re notes tied to the amount of mortgage insurance losses suffered.

The notes will provide fully-collateralized reinsurance protection for United Guaranty’s mortgage insurance risks. The collateral will be held in trust, as with all ILS and cat bond deals.

We understand that the Bellemeade Re notes were broadly marketed, but predominantly to investors who would understand mortgage insurance risk meaning that much of the ILS market may not have seen this deal.

The Bellemeade Re Ltd. transaction was placed as a standard Rule 144a offering to a broad group of money managers and mortgage specialist hedge funds, we understand.

The three tranches of notes have been collateralized with highly rated U.S. Treasury funds, we understand, as is typical of ILS transactions.

We’re told that AIG itself and BNP Paribas acted as co-managers for this transaction, while Credit Suisse was the sole bookrunner.