Arch Re’s recent $77.4 million cover for Freddie Mac—the troubled US Federal Home Loan Mortgage Corporation famous for taking a hit in the financial crisis—could signal growing opportunity in US public risk for private Bermuda reinsurance players.
According to Brad Kading, president and executive director the Association of Bermuda Insurers and Reinsurers (ABIR): “ABIR members are interested in expanding markets. Having government shed risk ultimately held by taxpayers is good for both the government and the private sector. Better to move the risk into the private sector where it can best be managed and where productive capital can be put to work.”
The November deal, which will cover credit losses for a portion of the credit risk associated with a pool of single-family loans funded in the third quarter, was the result of years of study by Arch Re. According to Andrew Rippert, CEO of global mortgage insurance and reinsurance, Arch Re took an interest in mortgage credit risk in the early days of the financial crisis.
Rippert explained: “with Freddie Mac and Fannie Mae under conservatorship and reforms being developed, we see a significant opportunity for private capital as those entities transfer credit risk that historically they’ve held on to. We believe that bringing private capital into this segment is good for everyone: borrowers, taxpayers, lenders and Arch shareholders.”
The opportunities don’t end there. Rippert told Bermuda:Re that Arch plans to pursue opportunities with Fannie Mae and continues to examine the possibilities presented by other public institutions, including the US Federal Housing Administration.
Kading said: “Flood, terrorism, crop, mortgage, earthquake—these are all examples of risk being held by various kinds of governments or their agencies. We are at the point where pressures to reduce government debt are intersecting with opportunities for insurers and capital providers that are willing to take on more risk. ABIR members want to be creative in helping solve these risk management problems.”
Rippert can see a growing role for private capital. He concluded: “at Arch we believe that a significant portion of that capital can take the form of reinsurance and insurance. The key is to structure coverage that is practical and efficient. That’s something we spend a lot of time working on and, importantly, we don’t ever stop thinking about new and better ways to try to improve upon the state-of-the-art.”
Arch Re, public risk, Fannie Mae, Freddie Mac, financial crisis, public-private partnership, ABIR