Bermudian insurance and reinsurance group Arch Capital is back in the insurance-linked securities (ILS) and capital market for another and even larger slice of collateralized reinsurance for its mortgage insurance book, marketing a $653.3 million Bellemeade Re 2018-2 Ltd. transaction.
This is Arch Capital Group’s fifth mortgage insurance linked note or mortgage insurance linked securities (ILS) issuance in the Bellemeade series of transactions and the third in the series since it acquired AIG’s United Guaranty, which had sponsored the first two Bellemeade Re mortgage ILS deals.
This is the largest Bellemeade mortgage insurance ILS deal to-date, at almost $653.3 million in size, and the largest issuance of mortgage insurance-linked notes since this market began, reflecting Arch Capital’s increasing appetite to tap the capital markets for fully collateralized mortgage reinsurance protection.
For this mortgage insurance-linked securities (ILS) transaction Arch has registered a new Bermuda domiciled special purpose insurer (SPI) Bellemeade Re 2018-2 Ltd.
The SPI is set to issue four tranches of ten-year notes which will be sold to investors to collateralize underlying mortgage reinsurance agreements that will protect the Arch Mortgage Insurance book on an indemnity basis over the 10 year term.
Another two tranches, or coverage layers, are to be largely retained by Arch Capital, including the first loss layer for the covered portfolio of mortgage insurance risks.
In this Bellemeade Re 2018-2 mortgage ILS deal from Arch, the reinsurance protection will cover a diverse portfolio of mortgage insurance policies related to 357,594 loans from across the 50 U.S. states, underwritten by Arch.
The mortgages are considered seasoned and the total balance of the insured mortgage loans covered by the policies amounts to $74.70 billion, while the aggregate of the mortgage insurance policy coverage is $12.81 billion.
This transaction features mortgage loans that are on average seasoned by 42 months, being originated between April 1, 2013 and Dec. 31, 2015.
It makes this mortgage ILS the first to feature older loans, as most other mortgage insurance-linked note transactions have featured more recently underwritten loans and insurance policies. Additionally, only 1.7% of the loans have experienced a delinquency in the prior 24 months.
This is a sign that Arch Capital is expanding the capital markets participation further into its mortgage reinsurance program, which if successful will likely mean more such deals from other sponsors in future as well.
The four tranches of ten-year term Bellemeade Re 2018-2 insurance-linked securities (ILS) will provide Arch with $653.3 million of fully-collateralized reinsurance coverage against potential losses on this portion of its mortgage insurance portfolio.
The four tranches of notes will be exposed to the risk of reinsured losses on the mortgage-insurance policies issued by Arch Capital Group subsidiary ceding insurers United Guaranty Residential Insurance Co., United Guaranty Mortgage Indemnity Co. and Arch Mortgage Insurance Co.
The Bellemeade Re Series 2018-2 transaction is made up of $236.973 million of class M-1A notes, $224.164 million class M-1B notes, $160.117 million class M-1C notes and $32.024 million class B-1 notes.
Fitch Ratings has assigned preliminary ratings to all four tranches of notes that are to be issued by Bellemeade Re 2018-2 Ltd., with the class M-1A notes rated ‘A+sf’, class M-1B notes rated ‘A-sf’, class M-1C notes rated ‘BBBsf’ and finally the class B-1 notes rated ‘BBBsf’.
Morningstar has also rated the transaction, giving the class M-1A notes a ‘AAA’ rating, the class M1-B notes a ‘AA’ rating, the class M1-C notes an ‘A’ rating and the class B-1 notes also an ‘A’ rating. Morningstar commented that, “The pool of insured mortgage loans for Bellemeade Re 2018-2 Ltd. is the strongest MI collateral pool that Morningstar has analyzed.”
The mortgage insurance ILS and mortgage insurance-linked note market is growing at a steady pace, with the mortgage insurance-linked note and ILS market currently at an outstanding size of $2.2 billion, so once this latest deal from Arch is completed it will be close to $3 billion in size.
Mortgage insurance-linked notes are not an investment for every ILS fund or investor, given they are exposed to an element of risk that is correlated with broader financial factors, such as interest rates.
But, as a diversifying ILS investment, there are some ILS investors who find these notes attractive, as part of a broadly diversified insurance-linked investment portfolio which would likely be dominated by catastrophe risks.
The long tenure of these mortgage ILS deals mean insurers can lock in mortgage reinsurance over long periods, providing greater financial certainty as well as access to efficient risk capital.