Bellemeade Re 2020-2 Ltd.

Arch Capital Group Ltd., the Bermuda headquartered insurance and reinsurance firm, is returning to the capital markets to secure its second mortgage insurance-linked securities (ILS) transaction of 2020, with a $363 million Bellemeade Re 2020-2 Ltd. transaction.

Arch Capital continues to persist after having faced some challenges with its earlier deal this year due to Covid-19 effects on the capital market and is now back with a Bellemeade Re 2020-2 Ltd. mortgage ILS deal that targets $363 million of coverage across 5 tranches of mortgage insurance linked notes that will be issued and sold to investors.

The proceeds from the sale of the notes will be used to collateralise excess of loss reinsurance arrangements between Bellemeade Re 2020-2 and Arch Mortgage Insurance, in a similar manner to a catastrophe bond transaction.

The new Bellemeade Re 2020-2 mortgage ILS deal features the following tranches of notes which are being marketed to investors, alongside their preliminary ratings from DBRS Morningstar:

• $92.0 million Class M-1A at BBB (high) (sf)
• $77.6 million Class M-1B at BBB (low) (sf)
• $103.5 million Class M-1C at BB (low) (sf)
• $71.9 million Class M-2 at B (sf)
• $18.0 million Class B-1 at B (low) (sf)

This is the 10th rated mortgage insurance linked note (ILN) transaction from Arch Mortgage Insurance or its United Guaranty subsidiary, which Arch acquired from AIG.

As with every mortgage ILS, the issued tranches of notes will be exposed to the risk of losses the ceding insurer pays to settle claims on the underlying mortgage insurance policies, so providing a source of indemnity reinsurance protection.

Each tranche covers different layers of risk, designed to cover mortgage insurance risks across a pool of insured mortgage loans consisting of 117,562 fully amortizing first-lien fixed- and variable-rate mortgages.

All of the subject mortgage loans from this Bellemeade Re 2020-2 ILS deal were originated on or after January 2019 and have never been reported to the ceding insurer as 60 or more days delinquent.

Special purpose insurer (SPI) Bellemeade Re 2020-2 will enter into reinsurance agreements with Arch on the execution of the securitisation, with the ceding insurer set to receive protection for the funded portion of any mortgage insurance losses across the term of the deal. In exchange for which, the ceding insurer will make premium payments related to the underlying insured mortgage loans to Bellemeade Re 2020-2, to fund the investor coupons.

DBRS Morningstar explained that, “Unlike other residential mortgage-backed security (RMBS) transactions, cash flow from the underlying loans will not be used to make any payments; rather, in MI-linked note (MILN) transactions, a portion of the eligible investments held in the reinsurance trust account will be liquidated to make principal payments to the noteholders and to make loss payments to the ceding insurer when settling claims on the MI policy.”

The notes will run across a ten-year term to August 2030, but amortise across that period.

Both Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company are acting as ceding insurers for this mortgage ILS deal.

Update:

Arch Capital’s second mortgage ILS deal of the year was well-received, upsizing to $423 million thanks to investor demand.

The transaction ended up with tranches at the following sizes:

• $91,990,000 class M-1A notes with a coupon equal to one-month LIBOR plus 230 basis points.
• $95,564,000 class M-1B notes with a coupon equal to one-month LIBOR plus 320 basis points.
• $128,066,000 class M-1C notes with a coupon equal to one-month LIBOR plus 400 basis points.
• $89,834,000 class M-2 notes with a coupon equal to one-month LIBOR plus 600 basis points.
• $17,966,000 class B-1 notes with a coupon equal to one-month LIBOR plus 850 basis points.

The company also secured a further $25,747,000 of mortgage reinsurance from a panel of reinsurers in tandem with the issuance of the Bellemeade Re 2020-2 securities.