Bellemeade Re 2021-3 Ltd.

This is the third mortgage insurance-linked securities (ILS) transaction of 2021 from global specialty insurance and reinsurance player Arch Capital Group and the seventeenth issuance of mortgage insurance-linked notes (ILN) under the Bellemeade Re program, since it began.

With this latest Bellemeade Re 2021-3 mortgage ILS, Arch Capital Group is seeking a collateralized and capital market investor backed source of reinsurance protection amounting to roughly $511.5 million.

Six tranches of mortgage insurance linked notes (ILN’s) are set to be issued by newly registered Bermuda special purpose insurer (SPI) Bellemeade Re 2021-3 Ltd.

The Bellemeade Re 2021-3 Ltd. mortgage ILS transaction seeks just over $511.5 million of excess-of-loss reinsurance protection for Arch Capital’s mortgage insurance books underwritten by its Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company subsidiaries.

The transaction will feature six tranches of rated mortgage ILS notes, each of which will be sold to capital market investors and the proceeds used to collateralize the necessary reinsurance agreements between Bermuda SPI Bellemeade Re 2021-3 Ltd. and Arch’s mortgage underwriting subsidiaries.

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.

The six 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 2021-3 Ltd. will seek to issue the following tranches:

• $157.4 million Class A-2 notes (rated A2 (sf) by Moody’s).
• $104.9 million Class M-1A notes (rated A2 (sf) by Moody’s; A (low) (sf) by DBRS Morningstar).
• $60.3 million Class M-1B notes (rated Baa2 (sf) by Moody’s; BBB (high) (sf) by DBRS Morningstar).
• $76.1 million Class M-1C notes (rated Baa3 (sf) by Moody’s; BBB (low) (sf) by DBRS Morningstar).
• $97.1 million Class M-2 notes (rated B1 (sf) by Moody’s; BB (low) (sf) by DBRS Morningstar).
• $15.7 million Class B-1 notes (rated B (high) by DBRS Morningstar).

The Class A-2 notes are a notable feature in this latest mortgage ILS deal from Arch Capital, the rating agencies explained, as this class will be locked out for principal payments until certain conditions are met, such as the payment date being on or after April 2025, or credit enhancement to an A-1 coverage layer reaching at least 10.0%, or a delinquency percentage falls below a pre-defined level.

The covered pool of insured mortgage loans consists of 93,138 fully amortizing first-lien fixed- and variable-rate mortgages, DBRS Morningstar said, with all the mortgage insurance policies being effective on or after January 2020 and on or before June 2021.

Moody’s also said on the subject business, “We expect this insured pool’s aggregate exposed principal balance to incur 2.08% losses in a base case scenario, and 15.87% 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 54 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.”

Update 1:

Arch Capital Group eventually secured close to $508 million of mortgage reinsurance through its latest Bellemeade Re 2021-3 Ltd. mortgage ILS transaction, but added another $131.5 million of reinsurance from the traditional market at the same time.

There were some adjustments to tranche sizes through the marketing of the deal and eventually Arch Capital secured almost $508 million of reinsurance through the transaction.

In total, Arch said that it secured more than $639 million of indemnity reinsurance protection, covering a pool representing approximately $28.7 billion of mortgages , using the Bellemeade Re 2021-3 Ltd. vehicle.

Bellemeade Re 2021-3 Ltd. funded its reinsurance obligations through the issuance of six classes of amortizing notes with 10-year legal final maturities.

The final mortgage ILS transaction arranged breaks down as follows:

• $122,961,000 class of A2 notes with a coupon equal to one-month SOFR plus 100 basis points.
• $104,926,000 class M-1A notes with a coupon equal to one-month SOFR plus 100 basis points.
• $64,329,000 class M-1B notes with a coupon equal to one-month SOFR plus 140 basis points.
• $81,397,000 class M-1C notes with a coupon equal to one-month SOFR plus 155 basis points.
• $115,524,000 class M-2 notes with a coupon equal to one-month SOFR plus 315 basis points.
• $19,005,000 class B-1 notes with a coupon equal to one-month SOFR plus 385 basis points.

On top of this, another $131,518,000 was placed with a panel of reinsurance companies, Arch explained.