Arch Capital Group, a specialized insurance and reinsurance company headquartered in Bermuda, has returned to the capital markets with its second Mortgage-linked securities (ILS) deal as it plans to reinsure around $ 522 million. Bellemeade Re 2021-2 Ltd. to deal with.
This will effectively be the sixteenth ILN bond issue under the Bellemeade Re deal program since its inception, and the fourteenth for Arch Capital since the United Guaranty acquisition, through which the company provides a flexible source of secured reinsurance to support the expansion of the underwriting business. mortgage insurance.
For now, it looks like Arch Capital is aiming to reinsurance secured mortgages in the capital markets for about $ 522 million in the latest Bellemeade Re 2021-2 deal.
The deal will include five tranches of ILS-rated mortgage bonds to be sold to capital market investors, and the proceeds will be used to secure the necessary reinsurance agreements between Bermuda SPI Bellemeade Re 2021-2 Ltd. and Arch’s mortgage underwriting subsidiaries, Arch Mortgage Insurance Company and United Guaranty Housing Insurance Company.
The promissory notes issued will be subject to the risk of losses that Arch mortgage insurer organizations pay to settle claims under the underlying mortgage insurance policy pool.
Ratings agency DBRS Morningstar said the deal would cover a pool of insured mortgages of 123,224 fully amortized fixed and variable rate mortgages.
The five tranches of mortgage-backed bonds will cover varying levels of risk for Arch Capital, but they are all relatively distant, and the company maintains a significant level of coverage before any of them face claims against them.
Bellemeade Re 2021-2 Ltd. will seek to issue the following tranches:
- US $ 194.5 million M-1A bonds (rated BBB (high) (sf) from DBRS Morningstar; A1 (sf) from Moody’s).
- M-1B class bonds worth $ 93.3 million (rating BBB (sf) from DBRS Morningstar; Baa1 (sf) from Moody’s).
- Bonds of M-1C class in the amount of $ 97.3 million (Moody’s Baa3 (sf) rating).
- Bonds of M-2 class for 105.4 million dollars (Moody’s rating – B1 (sf)).
- Bonds of class B-1 in the amount of $ 32 million (Moody’s rating – B3 (sf)).
Moody’s explained the risk profile of the mortgage pool, stating: “We expect the aggregate unprotected principal balance of this insured pool to suffer 1.68% loss in the base case and 15.13% loss under the Aaa stress scenario. The aggregate unprotected principal balance is the aggregate product of (i) the outstanding loan balance, (ii) the percentage of MI coverage for each loan, and (iii) one less the reinsurance percentage of the existing quota share. Almost all loans (with the exception of 31 loans) have 7.5% or 8.75% of the existing reinsurance quota of the share covered by unaffiliated third parties, therefore, 92.5% or 91.25%, respectively, the proportional share of losses from MI on such loans will be accepted for this transaction. For the rest of the loans that have a zero existing share reinsurance quota, the transaction will incur 100% of their MI losses. ”
Since the losses will apply to the underlying mortgage insurance policies and will trigger those promissory notes after the destruction of the entire lien, reinsurance will pay out causing principal losses from tranche B-1 and up.
The B-1 tranche will fund 98.6% of the reinsurance layer, while each tranche above will gradually fund slightly less, down to M-1A bonds, which will fund only 80% of the base coverage layer.
Including this new deal, Arch Capital plans to obtain about $ 7 billion in reinsurance through its ILS mortgage deals.