Mr. Michael Bennett:

I thank the Chairman and members of the committee, the invitation extended to Arch to attend this meeting. I am accompanied by my colleague, Mr. Florian Mayer. I will provide a brief introduction to Arch Capital, discuss the benefits of mortgage insurance and how the cost to consumers can be minimised.

Arch Capital Group Limited, is a Bermuda public limited liability company with approximately $6.98 billion in capital at 30 September 2014. Arch Capital is a NASDAQ listed company. Through its operations in Bermuda, the United States, Europe and Canada, Arch Capital writes specialty lines of property and casualty insurance and reinsurance, as well as mortgage insurance and reinsurance, on a worldwide basis. Arch Reinsurance Limited, the main insurance risk-bearing entity in Arch Capital has financial strength ratings of A1-, or outlook stable, from Moody’s; A+, outlook stable, from A.M. Best Company; A+, outlook stable, from Standard & Poor’s; and A+, outlook positive, from Fitch Ratings.

In 2009, in the aftermath of the global financial crisis, Arch Capital began to recruit its mortgage insurance team. The Arch mortgage insurance team has now more than 375 employees worldwide. The Arch mortgage insurance team is dedicated to providing risk management and risk financing products to lenders worldwide, through its three distinct platforms in the United States, Europe and Bermuda.

Our group of dedicated mortgage insurance and reinsurance professionals understands the unique requirements and challenges of mortgage insurance markets around the globe. Our market-specific knowledge and expertise enables our teams to provide creative and commercially viable solutions for our clients. Superior analytics and risk assessment, combined with outstanding client service, are at the forefront of all our activities.

In 2013, Arch Capital developed and delivered the first insurance contract on the Freddie Mac agency credit insurance structure. Freddie Mac is a US public Government-sponsored enterprise which seeks to reduce its risk exposure by obtaining insurance protection from private insurers. In 2014, Arch Capital completed the acquisition of CMG MI, a US mortgage insurer which is the leading provider of mortgage insurance to the US credit union sector.

Arch Capital established its presence in Ireland in 2008 and currently employs over 40 people through its subsidiary operations based at offices in Dublin and branches in Europe. In 2011, Arch Mortgage Insurance Limited was established. Arch Mortgage Insurance Limited is a mortgage insurer regulated by the Central Bank of Ireland and authorised to write mortgage insurance - non-life insurance class 14, credit insurance - in a number of EU member states on a freedom of services basis. Arch Mortgage Insurance Limited has financial strength rating of A plus - outlook stable - from Standard & Poor’s.

Mortgage insurance increases the resilience of the banking sector to property shocks by providing additional capital to absorb losses from stressed economic scenarios. The additional capital provided by mortgage insurers in respect of insured loans increases the aggregate stock of capital available to support mortgage lending. Insurers who have a strong international presence and write multiple lines of insurance are well placed to absorb losses from mortgage exposure in one country. The capital provided by international mortgage insurers has the benefit of being diversified from the capital base of the domestic banking sector. Mortgage insurance, through increasing the resilience of the banking sector to property shocks, reduces the potential need for future taxpayer support to the banking sector. Mortgage insurance may help improve loan underwriting quality as the mortgage insurer will provide feedback to the banking sector in terms of changes to underwriting standards and practices. The mortgage insurer effectively acts as a second pair of eyes.

The recent UK Treasury help-to-buy guarantee scheme for high loan-to-value mortgages achieved good take-up by lenders due to the approval by the UK regulator of the capital benefits to lenders who participated in the scheme. Lenders who participated in the guarantee scheme can hold less capital in respect of the guaranteed loans due to the fact that additional capital is being held by the guarantee scheme in respect of the covered loans. In Italy, the regulator gives preferential capital treatment to loans above 80% loan-to-value, LTV, where the loan is covered by mortgage insurance.

We encourage the Central Bank to provide clear guidance to lenders on the reduction in the capital they are required to hold when a loan is insured by a strongly capitalised and highly rated mortgage insurer. We note that the EU capital requirements regulations, CRR Article 202, in respect of eligible providers of unfunded credit protection require an equivalent rating of A- or above.

The cost of mortgage insurance is comprised of three components: the expected losses; the cost of capital which the insurer holds in respect of the insured risk; and the administrative costs of providing the insurance services, such as loan audits and claims handling. The larger of these components are the expected losses and the cost of capital, with the administrative costs being the smallest component.

Where mortgage insurance is provided in a regulatory framework which allows for capital benefits to lenders, the economic benefits of reduced losses for the lender and lower cost of capital for the lender balance off against the cost of these components in the mortgage insurance premium. The net economic cost of providing mortgage insurance is the frictional administrative cost of providing the insurance services. However, there are also additional benefits to the lender in terms of increased resilience to withstand adverse economic scenarios and lower volatility in the lender’s profitability. These benefits may enable the lender to access funding and capital from the capital markets more easily and cheaply than they would have done so in the absence of mortgage insurance.

We believe that the cost of mortgage insurance would not be fully passed through to the consumer, but rather lenders would adjust their pricing of mortgage interest rates to allow for the economic benefits of mortgage insurance to the lender.