Arch cancels $1.7bn of Bellemeade ILS as S&P rating change erodes capital relief

Arch Capital Group has canceled a number of its Bellemeade Re mortgage insurance-linked securities (ILS) agreements, with their notes due to be repaid later this year, as the reinsurer said the rating changes adopted by S&P have significantly reduces capital relief. ILS offers provided.

logo-mortgage-archIn total, Arch is terminating the reinsurance agreements and preparing to repurchase the notes associated with Bellemeade Re’s mortgage ILS agreements, which represented a significant reinsurance limit of $1.7 billion for its mortgage insurers.

This is a significant limit amount, representing just over half of the $3.2 billion in limit coverage that Arch had in effect for all of its mortgage insurance-related note vehicles prior to this decision.

Arch said that, since November 17, its mortgage insurance subsidiaries Arch Mortgage Insurance Company and United Guaranty Residential Insurance Company, which are the cedants of the Bellemeade Re ILS transactions, have exercised their rights to terminate the excess mortgage reinsurance agreements overall. they had contracts in force with certain Bellemeade Re special purpose reinsurance companies domiciled in Bermuda.

The re/insurer explained that the reinsurance agreements were canceled due to changes in insurer Standard & Poor’s (S&P) risk-based capital adequacy criteria.

Changes in rating criteria will impact the treatment of S&P capital by Bellemeade cedants (Arch MI and United Guaranty) for terminated Bellemeade agreements, the company said.

The changes to S&P’s rating criteria took effect on November 15, 2023, and before them, Bellemeade cedants received “significant capital relief from S&P through the terminated Bellemeade agreements,” Arch said.

But, after the rating criteria changes are implemented, “Bellemeade cedants will benefit from significantly reduced S&P capital relief,” the re/insurer explained.

For this reason, Arch is terminating the reinsurance agreements related to the following Bellemeade Re mortgage ILS transactions, all of which will have a payout date of December 27:

Arch said Bellemeade Re’s remaining mortgage ILS and their reinsurance agreements with Bellemeade cedants will remain in force subject to their terms.

Mortgage ILS deals are generally not entered into solely for the capital market-backed reinsurance protection they offer, with capital relief a key objective of their sponsors and this move by Arch could suggest that some of the other insurers US mortgage lenders that have existing mortgage ILS agreements in the market may also seek to cancel them, if the relief they provide has been significantly diminished by S&P’s rating changes.

Of course, this will also mean that sponsors of mortgage insurance-related securities issues may need to be more strategic in their approach to their use, ensuring that the reinsurance they provide is positioned at good levels to maximize the capital relief that the deals can provide. them.

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