Bermuda-based re/insurer Arch Capital Group Ltd. is back in the capital markets with the largest mortgage insurance-linked securities (ILS) transaction seen to-date, a $701 million Bellemeade Re 2019-3 Ltd. that also features the first-ever triple-A rated tranche of mortgage insurance-linked notes.
Arch Capital Group has become a significant user of capital markets backed reinsurance protection for its growing mortgage insurance book underwritten by Arch Mortgage Insurance (Arch MI).
After its most recent mortgage ILS deal, the $621 million Bellemeade Re 2019-2 Ltd. transaction that was issued in April, Arch had secured roughly $3.5 billion of reinsurance for its U.S. mortgage insurance book from the capital markets using ILS or catastrophe bond-like structures.
Now it is bringing the largest deal ever seen to market, using a newly registered Bermuda based special purpose insurer Bellemeade Re 2019-3 Ltd.
The name gives away the fact that this is already Arch’s third mortgage ILS transaction of the year, as it ramps up its use of collateralized reinsurance from the capital markets to support its growing mortgage insurance book.
Bellemeade Re 2019-3 Ltd. has been established to issue four tranches of mortgage insurance-linked notes, each of which will be sold to institutional investors and the proceeds used to collateralize underlying reinsurance agreements between the issuer and Arch Capital itself.
With a targeted issuance size of precisely $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 from the issuance having been given a preliminary triple-A rating from Morningstar.
As a result, this is perhaps the highest rated tranche of ILS notes providing reinsurance protection ever seen, 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.
These Bellemeade Re mortgage ILS transactions provide Arch with significant capital flexibility, enabling the re/insurer to continue its expansive mortgage insurance underwriting, safe in the knowledge that the capital markets are providing a source of efficient reinsurance capacity.