Arch targets annual Bellemeade Re mortgage ILS transactions

Arch Capital Group said that it intends to sponsor two more Bellemeade Re mortgage insurance linked security ILS transactions to cover its 2017 book and that it would like to sponsor additional takedowns annually going forwards, as it looks to the capital markets to help it managed its tail risks.

Insurance and reinsurance group Arch inherited the two in-force Bellemeade Re mortgage insurance ILS transactions after it acquired the sponsor of the transactions, mortgage insurer United Guaranty, from insurance giant AIG in an M&A deal that completed at the start of 2017.

AIG, through its United Guaranty mortgage insurance subsidiary, sought out reinsurance for its mortgage insurance portfolio using catastrophe bond-like ILS transactions with a $298.89 million Bellemeade Re Ltd. (Series 2015-1) in July 2015 and a $298.6 million Bellemeade Re II Ltd. (Series 2016-1) transaction in May 2016.

Following the acquisition there was no guarantee that Arch would continue to tap into the capital markets, but the insurer recently confirmed that it plans to continue the Bellemeade series of ILS deals.

Arch said that it plans to issue two Bellemeade Re mortgage insurance ILS transactions for the 2017 book year and then plans to make an annual issuance for every book year going forwards.

Of course the 2017 takedowns from Bellemeade Re could actually be in 2018, as they seek to cover the mortgage books growth across the calendar year.

The two in-force Bellemeade Re transactions both have 10 year durations, meaning that if Arch was to issue a mortgage ILS transaction every year the accumulating reinsurance coverage from the capital markets would become significant in size very quickly.

In this way Arch could leverage the capacity of the ILS and capital markets to take the peaks out of its mortgage insurance book, utilising the efficient capacity to help it expand its appetite for mortgage insurance risk and grow that book.

Arch has been growing its mortgage insurance portfolio quote aggressively anyway, mortgage risks fit well alongside its catastrophe exposures but are largely diversifying for its book as well.

Leveraging the capital markets to shed its mortgage tail risk can only help Arch to expand its mortgage insurance portfolio even more quickly.

Arch looks on the Bellemeade Re ILS transactions as a form of excess-of-loss reinsurance, but with funding provided by the capital markets.

The pricing on the coverage may well be cheaper than the traditional reinsurance market could offer as well, given the fact that capital market investors likely have a greater ability to diversify away the mortgage insurance related risk, and may also have a larger appetite for it as well.

Arch said that the transactions, alongside other sources of reinsurance, help it to reduce its realistic disaster scenario maximum losses, while also providing an effective way to manage tail risk through the economic cycle.

Shareholders will likely be encouraged to see Arch looking to tap into the capital markets as it grows its mortgage insurance book, while ILS investors and other institutional allocators will likely look favourably on any future Bellemeade Re mortgage insurance ILS deals.

These transactions are not for everyone though and some ILS funds and investors would not allocate to such transactions, given the fact mortgage insurance risk presents a greater chance of correlation with economic factors than natural catastrophe risks.

At this moment, mortgage insurance risk represents approximately 2.6% of the outstanding cat bond market, according to Artemis data, suggesting there is plenty of room for this peril to increase and soak up a greater share of the market, and plenty of capacity out there for re/insurers like Arch to tap.