Arch Capital Group, the Bermuda headquartered specialist insurance and reinsurance carrier, looks set to successfully re-open the capital markets to mortgage insurance risk with its second attempt to get a Bellemeade Re 2020-1 Ltd. mortgage ILS deal away.
While successful though, it looks like Arch Capital did not secure as much mortgage reinsurance protection as it had been seeking from its latest mortgage insurance-linked securities (ILS) deal, which our sources told us has now been priced at just over $450 million in size, but had been seeking around $528.5 million of protection at pre-sale.
As we explained earlier this month, Arch Capital had tried to tap the capital market for a new Bellemeade Re 2020-1 Ltd. issuance of mortgage insurance-linked notes earlier this year during the peaking of the pandemic, a transaction that would have been the largest ever example of a mortgage ILS issuance.
The mortgage insurance-linked securities (ILS) market had locked up and issuance come to a stand-still because of continued volatility in capital markets related to Covid-19, which had been affecting investor appetite.
That transaction could have been targeting as much as $957 million (perhaps more) of mortgage reinsurance for Arch, we’re told.
But now the company has brought it back in smaller size, with the transaction now priced and ready to transfer some $450 million of Arch’s mortgage insurance risk to capital market investors.
Arch has a history of issuing mortgage ILS, with some 10 transactions under its belt, accounting for $4.74 billion of mortgage insurance risk capital issued and sold to capital markets investors, and excess of loss mortgage reinsurance secured for the firm as a result.
With this latest deal, Arch Capital has secured investor support for an issuance of three tranches of mortgage ILS notes by Bermuda domiciled special purpose insurer (SPI) Bellemeade Re 2020-1 Ltd.
Originally, the transaction had been pre-sold as three tranches of mortgage insurance-linked notes (ILN) totalling $528.5 million, but at one stage that had fallen to a $410 million target and then at pricing yesterday we’re told that the three tranches eventually settled to secure some $450 million of mortgage reinsurance for Arch.
At this stage we’re not sure of the split across the three tranches, which are Classes M1-A (the least risky, which we understand to be the largest tranche), Class M1-B (the second largest, mid-risk layer) and Class B1 (much smaller than the other two and the riskiest tranche).
The transaction will provide Arch Capital with some $450 million of excess-of-loss mortgage reinsurance protection across its mortgage insurance portfolio.
The reinsurance coverage is for a portfolio of private mortgage insurance policies issued by Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company (UGRIC) and the notes are exposed to the risk of claims payments on the mortgage insurance policies.
The coverage is across a portfolio of mortgage insurance policies underwritten by Arch between Jul 1st 2019 to Dec 31st 2019.
The issuer Bellemeade Re 2020-1 Ltd. and Arch will enter into a reinsurance agreement to effect the coverage, with the investments in the three tranches of notes providing the collateral to underpin the agreement, as is typical of insurance-linked securities (ILS) deals such as catastrophe bonds.
It’s encouraging to see that Arch Capital has managed to get this new mortgage ILS transaction to market, as it is yet another sign that capital markets are reopening and ready to support more insurance-linked business.
Which should bode well for the ILS market as a whole, given interest in alternative asset classes, with defensive qualities and that offer a relatively uncorrelated return profile, is on the rise at this time.
We understand this Bellemeade Re 2020-1 Ltd. mortgage insurance-linked securities (ILS) deal from Arch Capital will complete before the end of June, placing it in the second-quarter.