US mortgage reinsurance offers respite in soft P&C market

Opportunities in the US mortgage business have provided reinsurers with some respite from deteriorating business conditions in traditional property casualty (P&C) reinsurance lines, but margins are tightening, according to an S&P Global Ratings report.

The returns in the mortgage reinsurance business have been fairly healthy, which attracts an increasing number of players in the hope of benefitting from still-decent margins helped by favourable macroeconomic conditions and thereby diversifying their business profile, S&P said in an Aug. 17 report titled “U.S. Mortgage Reinsurance Continues To Shine, Though Pricing Is Tightening”.

As the market matures, the number of re/insurers increases, and credit risk profile expands, the risk-adjusted returns will be pressured. However, S&P analysts continue to see near-term adequate returns, especially for re/insurers that participated early and built a portfolio of reinsurance deals. For re/insurers joining late to the game, replicating similar margins will be a difficult proposition; nevertheless, the opportunity remains.

The demand for mortgage reinsurance remains robust primarily driven by the government-sponsored entities (GSEs; Fannie Mae and Freddie Mac), which have been mandated to involve private capital to reduce taxpayers' exposure. Since 2013, GSEs have designed products (known as credit-risk transfer; CRT) for a range of participants including capital market participants (through securitization) and re/insurers. The amount of risk being laid off to private capital has been increasing over the years and a significant portion of that risk is placed in the re/insurance market. In addition, as the credit exposure for private mortgage insurers (PMI) grows, S&P expects PMIs to increase their reinsurance utilization to manage their risk and seek capital relief. Considering the long-tail nature of the liabilities, S&P expects there will be a need for additional capacity as existing re/insurers come close to their internal limits for mortgage exposure.

Considering the fundamental demand, the fact that the traditional reinsurance market is facing weak business conditions, and that the returns are attractive in mortgage reinsurance, the supply side has been expanding and S&P expects additional re/insurers to come online in the near term. Although the market has progressively expanded and the number of players interested in the GSE CRT programs has increased, the major re/insurance groups active in this market are largely domiciled in Bermuda or in the US for now. The large European reinsurers have not participated at all, or to a limited extent perhaps due to their experience through the financial crisis of 2008. However, that might not be the case indefinitely; hence, this market segment can potentially provide additional capacity.

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