Bellemeade Re 2021-2 Ltd. – Full details:
This is Arch Capital Group’s second mortgage insurance-linked securities (ILS) transaction of 2021 and will be the sixteenth mortgage insurance-linked notes (ILN) issuance under the Bellemeade Re program of deals since it began.
At the moment, it appears Arch Capital is targeting around $523 million of collateralized mortgage reinsurance from the capital markets through its latest Bellemeade Re 2021-2 deal (BMIR 2021-2).
The transaction will feature five tranches of rated mortgage ILS notes, that will be sold to capital market investors and the proceeds used to collateralize the necessary reinsurance agreements between Bermuda SPI Bellemeade Re 2021-2 Ltd. and Arch’s mortgage underwriting subsidiaries Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company.
The notes issued will all be exposed to the risk of losses Arch’s mortgage insurer entities pay to settle claims on an underlying pool of mortgage insurance policies.
Rating agency DBRS Morningstar said that the transaction will cover a pool of insured mortgage loans consisting of 123,224 fully amortizing first-lien fixed- and variable-rate mortgages.
The five tranches of mortgage-insurance linked notes will cover different attaching layers of risk for Arch Capital, but all are relatively remote and the company retains a significant layer of coverage before any of these would face claims against them.
Bellemeade Re 2021-2 Ltd. will seek to issue the following tranches, all have 10-year maturities:
- $194.5 million Class M-1A notes (rated BBB (high) (sf) by DBRS Morningstar; A1 (sf) by Moody’s).
- $93.3 million Class M-1B notes (rated BBB (sf) by DBRS Morningstar; Baa1 (sf) by Moody’s).
- $97.3 million Class M-1C notes (rated Baa3 (sf) by Moody’s).
- $105.4 million Class M-2 notes (rated B1 (sf) by Moody’s).
- $32 million Class B-1 notes (rated B3 (sf) by Moody’s).
Moody’s explained the risk profile of the mortgage insurance pool, saying, “We expect this insured pool’s aggregate exposed principal balance to incur 1.68% losses in a base case scenario, and 15.13% losses under loss a Aaa stress scenario. The aggregate exposed principal balance is the aggregate product of (i) loan unpaid balance, (ii) the MI coverage percentage of each loan, and (iii) one minus existing quota share reinsurance percentage. Nearly all of loans (except 31 loans) have 7.5% or 8.75% existing quota share reinsurance covered by unaffiliated third parties, hence 92.5% or 91.25%, respectively, pro rata share of MI losses of such loans will be taken by this transaction. For the rest of loans having zero existing quota share reinsurance, the transaction will bear 100% of their MI losses.”
As losses would be applied to the underlying mortgage insurance policies and trigger these notes after eroding all retention, the reinsurance would pay out, causing principal losses, from the B-1 tranche upwards.
The Class B-1 tranche will fund 98.6% of a reinsurance layer, while each tranche above will fund progressively slightly less, up to the Class M-1A notes which will only fund 80% of the reference coverage layer.
Arch secured its latest mortgage ILS at what it said was the best pricing and broadest investor participation of any Bellemeade Re deal, reflecting confidence returning to the market after the pandemic.
Arch revealed pricing details for the five classes of mortgage ILS notes offered by Bellemeade Re 2021-2 Ltd.:
- $194,532,000 class M-1A notes with a coupon equal to one-month SOFR plus 120 basis points.
- $93,334,000 class M-1B notes with a coupon equal to one-month SOFR plus 150 basis points.
- $97,265,000 class M-1C notes with a coupon equal to one-month SOFR plus 185 basis points.
- $105,704,000 class M-2 notes with a coupon equal to one-month SOFR plus 290 basis points.
- $31,972,000 class B-1 notes with a coupon equal to one-month SOFR plus 415 basis points.
The company also secured another roughly $93m of traditional reinsurance alongside the $523m Bellemeade Re 2021-2 mortgage ILS issuance, taking the total indemnity reinsurance secured to $616m.