Arch Capital Group Ltd., the Bermuda headquartered insurance and reinsurance firm with a growing mortgage insurance arm, is returning to the capital markets to secure its second mortgage insurance-linked securities (ILS) transaction of 2020, with a $363 million Bellemeade Re 2020-2 Ltd. transaction.
Arch Capital faced challenges in issuing its first mortgage ILS deal of 2020, as the deal was initially pulled at the start of the Covid-19 pandemic and then came back to market much smaller.
But persistence paid off and Arch secured roughly $450 million of capital markets backed mortgage reinsurance with its Bellemeade Re 2020-1 ILS deal, although the transaction did not provide the same PMIERs benefits as previous deals.
In fact, even in that second attempt Arch had to take a traditional reinsurance layer amounting to $78.5 million in order to secure the total amount of coverage it had wanted, showing that the capital markets were still not fully open to mortgage insurance risk by June.
But Arch Capital continues to persist and is now back with a Bellemeade Re 2020-2 Ltd. mortgage ILS deal that targets $363 million of coverage across 5 tranches of mortgage insurance linked notes that will be issued and sold to investors.
The proceeds from the sale of the notes will be used to collateralise excess of loss reinsurance arrangements between Bellemeade Re 2020-2 and Arch Mortgage Insurance, in a similar manner to a catastrophe bond transaction.
The new Bellemeade Re 2020-2 mortgage ILS deal features the following tranches of notes which are being marketed to investors, alongside their preliminary ratings from DBRS Morningstar:
- $92.0 million Class M-1A at BBB (high) (sf)
- $77.6 million Class M-1B at BBB (low) (sf)
- $103.5 million Class M-1C at BB (low) (sf)
- $71.9 million Class M-2 at B (sf)
- $18.0 million Class B-1 at B (low) (sf)
This is the 10th rated mortgage insurance linked note (ILN) transaction from Arch Mortgage Insurance or its United Guaranty subsidiary, which Arch acquired from AIG.
As with every mortgage ILS, the issued tranches of notes will be exposed to the risk of losses the ceding insurer pays to settle claims on the underlying mortgage insurance policies, so providing a source of indemnity reinsurance protection.
Each tranche covers different layers of risk, designed to cover mortgage insurance risks across a pool of insured mortgage loans consisting of 117,562 fully amortizing first-lien fixed- and variable-rate mortgages.
All of the subject mortgage loans from this Bellemeade Re 2020-2 ILS deal were originated on or after January 2019 and have never been reported to the ceding insurer as 60 or more days delinquent.
Special purpose insurer (SPI) Bellemeade Re 2020-2 will enter into reinsurance agreements with Arch on the execution of the securitisation, with the ceding insurer set to receive protection for the funded portion of any mortgage insurance losses across the term of the deal. In exchange for which, the ceding insurer will make premium payments related to the underlying insured mortgage loans to Bellemeade Re 2020-2, to fund the investor coupons.
DBRS Morningstar explained that, “Unlike other residential mortgage-backed security (RMBS) transactions, cash flow from the underlying loans will not be used to make any payments; rather, in MI-linked note (MILN) transactions, a portion of the eligible investments held in the reinsurance trust account will be liquidated to make principal payments to the noteholders and to make loss payments to the ceding insurer when settling claims on the MI policy.”
The notes will run across a ten-year term to August 2030, but amortise across that period.
Both Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company are acting as ceding insurers for this mortgage ILS deal.
It’s good to see Arch Capital continuing to look to the capital markets for mortgage reinsurance capacity, despite the challenges posed by the coronavirus pandemic and its impacts on investor appetites and concerns over mortgage delinquency rates.
In rating the notes, DBRS Morningstar said that Covid-19 and its potential effects on mortgage delinquency has been considered, so it’s to be assumed these are much higher up in the reinsurance tower than similar Bellemeade Re mortgage ILS issued prior to the pandemic.
In addition, investors are now demanding much higher returns for these mortgage ILS notes, so the cost of coverage has increased, while at the same time moving higher in the tower. Hence also the smaller size of the arrangement than some of Arch’s older Bellemeade deals.