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Arch sets up subsidiary to channel Freddie Mac mortgage risk to reinsurers

14th March 2018 - Author: Matt Sheehan

Arch Capital Group Ltd. has announced that a newly established U.S subsidiary, Arch MRT, will be piloting a new mortgage credit risk transfer program, called Integrated Mortgage Insurance (IMAGIN), in conjunction with the Federal Home Loan Mortgage Corporation (Freddie Mac).

Arch Capital logoThe arrangement will see Arch underwriting risks from Freddie Mac and acting as an intermediary of sorts, to channel them to reinsurance capital. In this way Arch will earn fee income while not putting its own balance-sheet capital at risk, while other reinsurers will be able to bid to access the mortgage risks it will cede.

Arch plans to use IMAGIN to attract a diversified and robust reinsurance capital base to the U.S housing market, which it hopes will support market stability through economic cycles.

The company’s new subsidiary, Arch MRT, will insure Freddie Mac and transfer 100% of the assumed risk to a panel of diversified, well-capitalised, and highly rated re/insurers that will provide high quality collateral assets held in trust accounts.

The process is designed to encourage extra funding to support first-loss exposure in mortgages, and will see re/insurers competitively bid to provide lower cost mortgage insurance for borrowers over the long term.

Arch is positioning itself as the go-between for mortgage risk from the U.S. government backed mortgage entity and the reinsurance markets, which could ultimately help to lower the cost of mortgage risk, benefiting U.S. homebuyers and earning Arch an additional source of fee income.

Arch, which has access to roughly $11.30 billion in capital, says that it remains committed to offering a variety of mortgage risk transfer solutions, including primary mortgage insurance via Arch Mortgage Insurance Company, credit risk transfer (CRT), mortgage risk transfer (MRT) through its new subsidiary, and additional forms of protection.

Arch also taps the capital markets for third-party capital support for its mortgage insurance book through the Bellemeade Re insurance-linked securitisations.

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