Arch secures first mortgage ILS of Covid-19 era, Capsicum Re assists on reinsurance

Arch Capital Group, the Bermuda headquartered specialist insurance and reinsurance carrier, has successfully secured $528 million of mortgage reinsurance through the completion of the first mortgage ILS deal of the Covid-19 era and by securing additional reinsurance with the assistance of broker Capsicum Re.

As we’ve reported before, Arch Capital successfully closed a $450 million Bellemeade Re 2020-1 Ltd. recently at the second attempt.

Arch had first tried for this Bellemeade Re 2020 mortgage insurance-linked securities (ILS) deal at a much larger size earlier on in the pandemic, but with the capital markets disrupted the deal had to be pulled.

So Arch returned in June, and as we reported at the time, even this second attempt had been at a larger size of $528 million to begin with.

But eventually the new Bellemeade Re 2020-1 transaction closed to offer $450 million of mortgage insurance linked notes to investors and Arch Capital opted to fill the rest of this layer with traditional mortgage reinsurance, it turns out.

Arch explained that its Arch Mortgage Insurance Company subsidiary has now secured the $528 million of reinsurance protection it had been seeking, with the deal now featuring the $450 million of mortgage insurance linked notes, plus a traditional reinsurance layer amounting to $78.5 million.

This $528 million of reinsurance covers a pool representing approximately $44 billion of mortgages for Arch MI, linked to 163,292 loans and issued by Arch MI and affiliates primarily in the second half of 2019.

Arch hails the deal as “the first mortgage credit risk transfer (CRT) completed by any company in the COVID-19 era.”

The capital markets had been acutely affected by the Covid-19 pandemic and investor concerns over where mortgage delinquencies could rise to had made issuing new mortgage ILS an impossibility.

Even now, a number of mortgage ILS deals have been triggered based on delinquencies rising, not to the degree of investor principal being lost, but the amortisation has been stopped while delinquencies are increasing.

We assume that Arch’s new Bellemeade deal sits higher up, in terms of where it could be triggered by delinquencies, so making it an investable prospect still, despite the ongoing pandemic crisis developing in the United States where cases of the corornavirus are still rising fast.

The mortgage ILS deal was also the first rated by Moody’s, with the agency providing an A1 rating for the most senior M-1A class notes, while DBRS Morningstar provided an A (low) rating on the most senior notes.

As a result of the challenges faced in placement of this deal, which would normally be fully backed by the capital markets, Arch noted this is “the inaugural Bellemeade transaction to include coverage from both fixed income investors and reinsurers.”

Details on the Bellemeade Re 2020-1 mortgage ILS transaction and the resulting $45o million of notes can be found, alongside every other mortgage ILS transaction, in our Deal Directory here.

“We’re pleased that we were able to bring this transaction to market during this period of uncertainty related to COVID-19,” explained Jim Bennison, EVP, Alternative Markets for Arch MI. “The response from both fixed income investors and reinsurers speaks to the attractiveness of our program. This is our eleventh Bellemeade transaction and the program remains an important tool for managing the risk and capital requirements of our U.S. Mortgage Insurance business.”

The additional $78.5 million of mortgage reinsurance was placed with a panel of reinsurers with the support of specialist broker Capsicum Re.

“We are extremely pleased to represent Arch MI and to have succeeded in raising the required direct reinsurance capacity for its Bellemeade program,” Freddie Scarratt, Account Executive at Capsicum Re, who managed and placed the reinsurance capacity of the transaction, explained.

“Despite the macroeconomic headwinds and financial market volatility of recent months, reinsurers have demonstrated their openness to new transactions and willingness to work in collaborative partnership with specialist brokers and clients on their risk transfer needs. We hope this transaction will prove to be just the start of a long relationship between Arch MI and reinsurers in providing diversified counterparty capital to Bellemeade.

“The fact that this is the first mortgage indemnity insurance-linked note (ILN) transaction since the onset of COVID-19 – and the first to incorporate direct reinsurance capacity – also underlines the importance of reinsurance as a capital source in the marketplace,” Scarratt continued.

Steve Rance, Managing Partner of Mortgage Indemnity Reinsurance at Capsicum Re, also said, “This is the second large mortgage insurance placement our specialist team has placed in the US post COVID. Raising in excess of the required capacity in today’s challenging environment is an exceptional result. It is testament to both the quality of Arch MI’s mortgage book and the deep expertise and strong market relationships of our team.”

You can read all about this Bellemeade Re 2020-1 Ltd. mortgage ILS and details on over 670 insurance-linked securities (ILS) transactions in the Artemis Deal Directory.