Arch Capital Group Ltd. is returning to the capital markets for its second mortgage insurance-linked securities (ILS) transaction of 2019, a $621 million Bellemeade Re 2019-2 Ltd. transaction.
Arch Capital has become a significant user of capital markets backed and fully collateralized reinsurance to support its growing mortgage insurance business.
For this latest mortgage ILS transaction, Bermuda domiciled special purpose insurer Bellemeade Re 2019-2 Ltd. has been established for the sole purpose of issuing mortgage insurance-linked securities (ILS).
Bellemeade Re 2019-2 will seek to issue five tranches of mortgage ILS notes, that will each be sold to capital market investors and their proceeds used to collateralize underlying mortgage reinsurance agreements between the SPI and Arch Capital entities.
This Bellemeade Re 2019-2 issuance will see Arch Capital looking to secure just slightly over $621 million of fully collateralized mortgage reinsurance from the capital markets, across the five tranches of mortgage ILS notes being issued.
The transaction will feature a $133.1m Class M-1A tranche, a $133.1 million Class M-1B tranche, a $168.56 million Class M-1C tranche, a $164.13 million Class M-2 tranche and a $22.18 million Class B-1 tranche.
Class M-1A is the least risky and then the exposure to noteholders rises as you move down the tranches from there. Morningstar has rated the notes: M-1A – “A”; M-1B – “A1”; M-1C – “BBB-“; M-2 – “BB-“; B-1 – “BB-“.
The transaction will cover a percentage of the risk for a pool of relatively recently originated mortgage-insurance policies linked to residential loans, none of which have been reported as in default as of the cut-off date.
“The balance of the insured mortgage loans covered by the policies is $35.58 billion, and the aggregate of the mortgage-insurance policy coverage amount is $8.87 billion,” rating agency Morningstar explained.
The reinsurance provided by Bellemeade Re 2019-2 will provide indemnity based protection for $621 million of the mortgage insurance policy coverage amount, while the remainder will either be retained by Arch Capital or perhaps traditional reinsured alongside this latest mortgage ILS deal.
The $621 million of mortgage ILS notes issued by Bellemeade Re 2019-2 will be exposed to the risk of reinsured losses on the portfolio of mortgage insurance policies. The policies have all been issued by Arch Mortgage Insurance Co. and United Guaranty Residential Insurance Co., which are the ceding insurers for the purposes of the transaction.
The riskiest tranche of notes have a lower attachment point than the previous Bellemeade Re deal, while the portfolio of mortgage loans have been seasoned for fewer months than recent mortgage ILS deals.
It’s a stark contrast to Arch’s previous mortgage ILS deal, which featured much older mortgage insurance policies, with much longer seasoning term.
These Bellemeade Re mortgage ILS transactions provide Arch significant flexibility and capital, helping the firm to continue its expandsive mortgage insurance underwriting safe in the knowledge that the capital markets are open and available as a source of efficient reinsurance capacity.
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