Arch targets up to $317m Bellemeade Re 2022-1 mortgage ILS issuance

Arch Capital is aiming to secure up to $317 million of mortgage reinsurance protection from its first insurance-linked securities (ILS) transaction of the year, by sponsoring a Bellemeade Re 2022-1 Ltd. mortgage insurance-linked notes issuance.

There’s some uncertainty over the eventual size of this transaction, according to our sources, but the issuance could be as large as $317 million, should Arch choose to fully-fund all five tranches of notes set to be issued.

Although other sources suggest it could be partially funded, which would bring the issuance closer to $277 million of notes, we’re told.

Arch Capital has established Bellemeade Re 2022-1 Ltd. as a new Bermuda based special purpose insurer (SPI) for this issuance and the SPI will issue and sell five tranches of mortgage insurance-linked notes to capital market investors.

Each tranche represents a different level of risk and the proceeds from the sale of the notes will collateralize underlying mortgage reinsurance agreements between the issuer, Bellemeade Re 2022-1 Ltd. and Arch’s mortgage insurer entities Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company.

Each of the five tranches of notes issued by Bellemeade Re 2022-1 notes are exposed to the risk of claims payments on the subject mortgage insurance policies.

Depending on the notes’ priority, the tranches could incur principal and interest losses should the ceding insurer makes claims payments on the mortgage insurance policies covered by the deal.

The notes have a ten-year term and will amortise alongside the mortgage loans and covered insurance policies.

We understand Arch aims to fund each tranche of notes by a minimum of 80%, but that the targeted coverage could be far higher if investor appetite allows the company to secure more reinsurance protection from this latest mortgage ILS deal, up to the maximum fully-funded issuance size of $317 million, while some sources say the target will be $277 million and additional traditional reinsurance will likely be procured alongside this deal.

Interestingly, rating agency DBRS Morningstar highlights something a little more unusual about this mortgage ILS transaction, saying, “In this transaction, there could be loans located in counties designated by the Federal Emergency Management Agency (FEMA) as having been affected by a non-coronavirus-related natural disaster. Mortgage insurance policies generally exclude physical damage in excess of $5,000.”

We haven’t seen that mentioned with respect to other mortgage ILS, suggesting that it could be that the subject mortgage loans cover an area where a recent major catastrophe event, such as the December tornadoes or Colorado wildfire occurred.

Rating agency Moody’s is only rating four tranches of notes from this transaction. Moody’s also sees the issuance as possibly fully-funded, which would be a $317 million issuance:

• $79.2 million Class M-1A, Assigned (P)Baa2 (sf)
• $63.4 million Class M-1B, Assigned (P)Baa3 (sf)
• $126.7 million Class M-1C, Assigned (P)Ba3 (sf)
• $31.7 million Class M-2, Assigned (P)B3 (sf)
• $15.8 million Class B-1, Unrated.

DBRS Morningstar has opted for the less-funded deal size, of $277 million and will rate all five tranches of notes issued by Bellemeade Re 2022-1:

• $63.4 million Class M-1A at BBB (high) (sf)
• $53.8 million Class M-1B at BBB (sf)
• $117.8 million Class M-1C at BB (sf)
• $29.5 million Class M-2 at B (high) (sf)
• $12.7 million Class B-1 at B (high) (sf)

Arch Capital has used insurance-linked securities (ILS) to secure mortgage reinsurance consistently through recent years.

This new Bellemeade Re 2022-1 mortgage ILS is the insurers sixteenth directly sponsored transaction and the eighteenth in the Bellemeade Re series of issues of mortgage insurance-linked notes (ILN’s) since 2015.

This mortgage ILS issuance will take the Bellemeade Re series of issuances to more than $8 billion since it began and just in 2021 Arch sponsored more than $1.6 billion of mortgage insurance-linked securties (ILS) under the program.

If this 2022-1 issuance from Bellemeade Re ends up fully-funded at $317 million it will still be the smallest mortgage ILS issuance from Arch Capital since 2016.

Should it be partially funded and $277 million in size, it will actually be the smallest Bellemeade Re deal ever.

That may reflect market conditions, with Arch perhaps testing the appetite of investors to start the year. Or it could reflect a declining need for reinsurance at this time, as Arch has grown its mortgage business very rapidly through recent years and this could now be slowing a little, while there is still significant reinsurance in-force from other recent Bellemeade Re deals.

You can read all about this new Bellemeade Re 2022-1 Ltd. mortgage insurance-linked securities (ILS) transaction from Arch Capital and every other mortgage ILS deal ever issued in our Artemis Deal Directory.