Arch targets $163.2m Bellemeade Re 2024-1, the first mortgage ILS deal of 2024

Arch Capital is attempting to reopen the market for mortgage insurance-linked securities (ILS) with the first issuance of mortgage insurance-linked notes seen in 2024, seeking $163.2 million in capital markets backed mortgage reinsurance through Bellemeade Re 2024-1 Ltd.

The major US mortgage insurers have been conspicuously absent from capital markets since November 2023.

Arch Capital remains the most prolific of sponsors in the mortgage insurance-linked securities (ILS), or mortgage insurance-linked notes, sector, with 20 deals under the Bellemeade name already completed, 18 of which were directly for Arch but the first two for its United Guaranty subsidiary when it was owned by AIG.

However, the last Bellemeade Re mortgage insurance-linked notes issuance was back in October 2023, which was its first deal in a year at that time.

Mortgage insurers shied away from the securitized markets for sourcing reinsurance during a period of capital markets volatility, while interest rates and a need to pay investors higher spreads had also been a driver of the slowdown seen.

But, in addition, certain changes to rating methodologies meant that mortgage ILS deals were not delivering the capital relief originally envisaged, which resulted in a wave of early redemptions of mortgage ILS notes and brought the market to a halt.

Now, Arch Capital seems to think the time is right to reopen this market, having registered a vehicle to become a special purpose insurer (SPI), Bellemeade Re 2024-1 Ltd., in Bermuda.

The company will be used for the issuance of insurance-linked securities (ILS) tied to mortgage insurance risks, and Aon Insurance Managers (Bermuda) Ltd. is managing the vehicle for the sponsor.

Five rated tranches of mortgage insurance-linked notes are set to be offered to capital market investors and issued by Bellemeade Re 2024-1.

If successfully sold to investors they will provide Arch Capital’s mortgage insurance entities, Arch Mortgage Insurance Company (AMIC) and United Guaranty Residential Insurance Company (UGRIC), with at least $163.2 million of mortgage reinsurance sourced from the capital markets.

The five rated tranches of notes that Bellemeade Re 2024-1 will issue are backed by reinsurance premiums, eligible investments, and related account investment earnings, relating to a pool of mortgage insurance policies linked to residential loans in each case.

They are exposed to the risk of losses the ceding insurer pays to settle claims on the underlying mortgage insurance policies, so the sale of the notes will provide the collateral to cover that risk with reinsurance.

The subject pool of insured mortgage loans consists of 91,613 fully amortizing first-lien fixed- and variable-rate mortgages, all underwritten to a full documentation standard, with original loan-to-value ratios less than or equal to 100.0%, and never having been reported to the ceding insurer as 60 or more days delinquent.

The mortgage loans all have insurance policies that came into force from January 2023 to June 2024.

Details of the five tranches of mortgage insurance-linked notes being offered, which all have a 10-year term, and their Morningstar DBRS ratings can be seen below:

$35.0 million Class M-1A at BBB (low) (sf)
$53.6 million Class M-1B at BB (high) (sf)
$37.3 million Class M-1C at BB (low) (sf)
$25.6 million Class M-2 at B (high) (sf)
$11.7 million Class B-1 at B (sf)

When Bellemeade Re 2024-1 completes this issuance of mortgage insurance-linked notes, the SPI will enter into a reinsurance agreement with the ceding insurer, Arch’s MI entities, and they will receive collateralized reinsurance protection for the funded portion of the mortgage insurance losses.

The target is for each tranche to raise sufficient capital to 80% fund a corresponding layer of reinsurance and the proceeds from the sale of the notes will be used to purchase eligible investments that will be held in the reinsurance trust account, much like any other ILS transaction.

This Bellemeade Re 2024-1 mortgage ILS transaction will transfer the credit risk associated with the mortgage insurance policies across the defined pool of mortgages to the capital markets for Arch.

Arch will bear a first loss retention layer sitting beneath these tranches of notes, while after that the notes would take losses in order of priority.

We understand there is likely to be traditional mortgage reinsurance purchased alongside the issuance of these notes, to build Bellemeade Re 2024-1 into a more meaningful source of protection for Arch Capital’s mortgage insurance business.

You can read all about the Bellemeade Re 2024-1 Ltd. mortgage insurance-linked securities transaction and every other mortgage ILS deal by filtering our extensive Artemis Deal Directory.