Expansive mortgage insurer Arch Capital Group Ltd. is back in the capital markets for another mortgage insurance-linked securities (ILS) transaction, a $341.8 million Bellemeade Re 2019-1 Ltd. transaction.
Arch has already securitized at total of $2.5 billion of in-force mortgage insurance risk, transferring it to capital market investors to secure fully collateralized reinsurance protection, according to Artemis’ leaderboard tracking the ILS sponsors of the world (where Arch sits in second).
While these mortgage ILS transactions aren’t so attractive to the usual ILS investor suspects, given their evident correlation with the economic cycle, they are attracting new fixed income investors to insurance and reinsurance linked investing.
Bellemeade Re 2019-1 is a Bermuda domiciled special purpose insurer, established to issue tranches of notes that will be sold to investors with the proceeds used to collateralized underlying reinsurance agreements between the SPI and Arch entities.
This mortgage ILS transaction is a little different, being the first that will provide reinsurance to Arch for a portfolio of insurance that is almost half made up of modified mortgage loans.
Credit rating agency Morningstar explained, “Bellemeade Re 2019-1 is Arch Capital Group Ltd.’s fifth rated transaction and 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 provided by the reinsurance agreement. The pool of insured mortgage loans consists of fully amortizing, fixed- and variable-rate first-lien loans that are not in default as of the cutoff date. Approximately 49.1% of the insured mortgage loans are modified. For approximately 38.3% of the insured mortgage loans, the ceding insurer has entered into settlement agreement, wherein the ceding insurer is restricted from denying or curtailing claims or terminating coverage on the basis of most origination defects and servicing-related conduct. The pool of insured mortgage loans is significantly seasoned, and approximately 88.2% of the mortgage loans have been performing for at least 24 months. The pool is geographically diverse, with the largest state concentration in Florida at approximately 7.3% of the balance.”
The insured mortgage loans covered by these policies amount to $22.97 billion, and the aggregate of the mortgage-insurance policy coverage amount is $5.94 billion, with the notes to be issued set to provide a slice of reinsurance from the capital markets to support Arch’s claims under the portfolio.
The deal is structured to offer investors four tranches, in Classes M-1A, M-1B, M-2, and B-1 of notes.
The $341.8 million of notes will be exposed to the risk of reinsured losses across the covered mortgage-insurance policies issued by ceding insurers Arch Mortgage Insurance Co. and United Guaranty Residential Insurance Co., both of which are Arch subsidiaries.
The Class M1-A tranche is targeting $127.8 million of cover, the Class M1-B tranche $106.995 million, the Class M-2 $92.134 million and the Class B-1 $14.861 million.
Class B-1 is the riskiest, so would take losses first and then any covered losses would eat into the reinsurance provided by M-2, M1-B and finally M-1A tranches.
It will be interesting to see how successful or large this mortgage ILS transaction from Arch is at completion, as it does offer a different type of risk profile given the modified nature of many of the insured mortgage loans.
Morningstar said that, “This is the most seasoned mortgage insurance collateral that we have analyzed,” given roughly 73.2% of the loans were originated prior to 2010.
As a result, the two more remote risk tranches have both been rated a notch lower than the last Bellemeade Re mortgage ILS deal.
Most mortgage ILS deals have featured recently originated loans, often in the same year and unmodified as well.
Hence with this latest Bellemeade Re deal Arch is seeking to expand the collateralized mortgage reinsurance protection it receives from the capital markets, which if successful could help it by providing further capital flexibility to expand its mortgage risk underwriting appetite.