Arch Capital Group, the Bermuda-headquartered specialty insurance and reinsurance company, has returned to the capital markets and insurance-related securities (ILS) seeking greater reinsurance protection for mortgages, launching its third $511 ILS mortgage deal of the year. .5 million Bellemeade Re 2021-3 Ltd. transaction.
This new Bellemeade Re 2021-3 Ltd., through which Arch hopes to obtain at least $511.5 million in capital markets reinsurance, is actually the fifteenth to be sponsored directly by the company.
But it is the seventeenth ILS issuance of mortgages under the Bellemeade Re program, as the first two were sponsored by AIG subsidiary United Guaranty, which Arch Capital later acquired and thus inherited the program.
The Bellemeade Re 2021-3 Ltd. Mortgage ILS transaction seeks just over $511.5 million in loss reinsurance protection for Arch Capital’s mortgage insurance books, underwritten by its subsidiaries Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company.
The transaction includes six tranches of rated ILS bonds, each of which will be sold to capital market investors and the proceeds will be used to fund the necessary reinsurance arrangements between Bermuda SPI Bellemeade Re 2021-3 Ltd. and Arch’s mortgage underwriting subsidiaries.
The bonds issued will all be exposed to the risk of losses that Arch’s mortgage insurers pay to settle claims on an underlying pool of mortgage insurance policies.
The six tranches of mortgage-linked bonds cover several adherent layers of risk for Arch Capital, but all are relatively remote, and the company retains a significant layer of coverage before any of these would have any claims against them.
Bellemeade Re 2021-3 Ltd. will endeavor to issue the following tranches:
- $157.4 million Class A-2 notes (rated A2 (sf) by Moody’s).
- 104.9 million Class M-1A bonds (rated A2 (sf) by Moody’s; A (low) (sf) by DBRS Morningstar).
- $60.3 million Class M-1B bonds (Baa2 (sf) rating by Moody’s; BBB (high) (sf) by DBRS Morningstar).
- $76.1 million Class M-1C bonds (Baa3 (sf) rating by Moody’s; BBB (low) (sf) by DBRS Morningstar).
- $97.1 million Class M-2 notes (rated B1 (sf) by Moody’s; BB (low) (sf) by DBRS Morningstar).
- $15.7 million Class B-1 bills (reviewed by DBRS Morningstar).
The class A-2 notes are a notable feature in this latest ILS mortgage deal from Arch Capital, the rating agencies explained, because this class is excluded from principal payments until certain conditions are met, such as the payment date on or after April 2025, or credit improvement to an A-1 funding tier reaching at least 10.0%, or a default rate falling below a predetermined level.
The secured pool of secured mortgage loans consists of 93,138 fully amortizing mortgages with a first lien and floating rate, according to DBRS Morningstar, with all mortgage insurance policies in effect on or after January 2020 and on or before June 2021.
Moody’s also said on the subject: “We expect the total exposed principal balance of this insured pool to incur 2.08% losses in a baseline scenario, and 15.87% losses on loss in an Aaa stress scenario. The aggregate principal balance exposed is the total product of (i) the unpaid balance of the loan, (ii) the MI coverage rate of each loan, and (iii) one minus the existing quota stock reinsurance rate. Nearly all loans (except 54 loans) have 7.5% or 8.75% existing quota share reinsurance secured by unaffiliated third parties, hence 92.5% or 91.25% pro rata share of MI losses respectively of such loans will be taken by this transaction. For the remainder of the loans without existing quota stock reinsurance, the transaction will bear 100% of their MI losses.
Including this new Bellemeade Re 2021-3 transaction, Arch Capital will have secured nearly $7.4 billion in reinsurance to date through its ILS mortgage agreements, while the Bellemeade Re program, including the two agreements when AIG was the beneficial owner , will amount to nearly $8 billion in reinsurance. reinsurance insured.