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Bellemeade ILS help Arch manage growing mortgage risk profile: Grandisson


Arch Capital Group’s issuance of mortgage insurance-linked notes, via its Bellemeade issuance platform, lowers shareholders’ exposure to the tail impacts on Arch’s business from economic recessions, subsequently supporting growth, says President and Chief Executive Officer (CEO), Marc Grandisson.

Marc Grandisson, Arch CapitalAs shown by the Artemis Deal Directory, six Bellemeade Re mortgage insurance-linked securities (ILS) deals have been issued since 2015, amounting to just shy of $2.5 billion of risk capital issued.

That is becoming a significant and growing contributor to Arch’s overall mortgage reinsurance program.

The first two deals to come to market, Bellemeade Re Ltd. (Series 2015-1) and Bellemeade Re II Ltd. (Series 2016-1) were sponsored by AIG’s United Guaranty, which was subsequently acquired by insurance and reinsurance firm Arch Capital.

Since the takeover, four Bellemeade Re ILS deals have been issued under the watch of Arch, with each of these deals being larger in size than any issued prior to the acquisition. The largest of these, the $653.3 million Bellemeade Re 2018-2 Ltd. transaction, is larger than the two United Guaranty sponsored deals combined.

Arch’s Q4 2018 net income took a hit from natural catastrophe losses, but once again, strong earnings in its mortgage segment offset the impacts of cat losses on its property and casualty (P&C) segments.

Speaking during the insurance and reinsurance firm’s Q4 and full-year 2018 earnings call, President and CEO Grandisson underlined the value of its mortgage-related capital markets activities.

“In our mortgage segment our issuance of insurance-linked notes, known as Bellemeade securities, have significantly reduced our shareholders’ exposure to the tail effects on our business from economic recessions, and that has paved the way for a significant reduction in our risk profile, despite growth of our insurance in-force,” said Grandisson.

When compared with the fourth-quarter of 2017, Arch’s U.S. new mortgage insurance written reached $16.7 billion in Q4 2018, which is growth of 16%.

Grandisson said that the underwriting environment remains “very attractive”, underlined by ongoing insurance in-force growth that is producing strong increases in earned premiums, that will ultimately “contribute to a future stream of earnings that is both stable and predictable.”

The issuance of mortgage ILS deals, from Arch and others, has increased substantially in recent times, as has the size of the transactions.

This suggests that the investor base is becoming more and more comfortable with this type of risk, and is further evidence of both the willingness and ability of the ILS community to expand its remit outside out of the highly competitive property catastrophe space.

While the mortgage ILS deals are not suited to every ILS investor, they are gaining increasing acceptance among large institutions and this could also help to introduce a wider range of investors into the broader ILS market as well.

Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.

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