Bellemeade Re 2019-3 Ltd.

Arch Capital is looking to expand its capital markets backed mortgage reinsurance protection with its third mortgage insurance-linked securities (ILS) transaction of the year.

Bellemeade Re 2019-3 Ltd. has been established in Bermuda for the purpose of issuing four tranches of mortgage insurance-linked notes, that will be sold to investors and the proceeds used to collateralize underlying reinsurance agreements between the issuer and Arch Capital.

With a targeted issuance size of $700.92 million, this Bellemeade Re 2019-3 mortgage ILS transaction will be the largest from Arch to-date and also the largest mortgage ILS transaction we’ve recorded so far (details on all the mortgage ILS we’ve covered can be found here).

The Bellemeade Re 2019-3 mortgage ILS transaction is also set to be the highest rated ever seen, with the most senior tranche of notes having a triple-A rating from Morningstar.

As a result, that is in fact the highest rated tranche of ILS notes that provide reinsurance protection ever, as ILS and catastrophe bonds are typically much lower rated due to their ratings being linked to the catastrophe risks they usually carry.

This is the seventh rated transaction from Arch subsidiaries, the eighth mortgage ILS deal under the Bellemeade Re name in total.

Rating agency Morningstar gave more details on the fundamentals of the transaction:

Bellemeade Re 2019-3 Ltd. is backed by reinsurance premiums and related account investment earnings and reversionary interests, in each case relating to a pool of mortgage-insurance policies linked to residential loans. The residential mortgage loans are insured against certain losses by mortgage insurance policies that are in turn subject to the coverage by the reinsurance agreement. The pool of insured mortgage loans consists of fully amortizing, fixed- and variable-rate, first-lien loans. The pool is geographically diverse, with the largest state concentration in Texas at approximately 7.7% of the unpaid principal balance.

The balance of the insured mortgage loans covered by the policies is $49.62 billion, and the aggregate of the exposed principal balance associated with the mortgage-insurance policy coverage is $9.28 billion. Of this, reinsurance provided by the issuer equals the offered balance of $700.9 million, which consists of Classes M-1A, M-1B, M-1C, and B-1. The offered notes are exposed to the risk of reinsured losses on the mortgage-insurance policies issued by Arch Mortgage Insurance Co. and United Guaranty Residential Insurance Co., the ceding insurers.

The transaction is split into $222.809 million of Class M-1A notes that are rated AAA by Morningstar, $$278.511 million of Class M-1B notes rated AA-, $$176.39 million of Class M-1C notes rated A-, and $$23.21 million of Class B-1 notes that are rated BBB+.

One of the factors that may have influenced the higher rating of the most senior tranche of notes in this mortgage ILS transaction is that with the mortgage loans covered by the subject insurance having been seasoned for an average of 33 months, the value of the properties covered have increased quite significantly since the loans were taken out.

This reduces the risk of claims on the subject mortgage insurance policies.

As a result, the Morningstar loan to value ratio is lower than on other recently rated mortgage insurance-linked notes deals, resulting in lower defaults and claims payouts under the analysis of the deal.

Each of the tranches of notes issued will have ten-year final maturities set for July 2029.

Update 1:

Commenting on the successful issuance, Jim Bennison, EVP, Alternative Markets for Arch Capital Group (U.S.) Inc., explained, “Since the inception of the Bellemeade ILN program, one of our goals has been to transfer a portion of the risk across the entire U.S. mortgage insurance portfolio, which we’ve now largely achieved.

“With over four billion dollars of aggregate reinsurance protection on our portfolio, we believe we’re at the forefront of managing capital and risk in the mortgage insurance industry.”

Arch noted the transaction is the “the largest individual ILN ever conducted by a mortgage insurance company.”

The deal provides Arch with exactly $700,920,000 of indemnity reinsurance on a pool representing $49.6 billion of mortgages, with the portfolio of MI policies linked to 219,994 loans issued by Arch MI and affiliates in 2016.

Arch also disclosed the pricing of the four tranches of mortgage insurance-linked notes, explaining that the $222.809 million of class M-1A notes priced with a coupon of one-month LIBOR plus 110 basis points, the $278.511 million of class M-1B notes at LIBOR plus 160 basis points, the $176.39 million of class M-1C notes at LIBOR plus 195 basis points, and the $23.21 million of class B-1 notes priced at LIBOR plus 250 basis points.