Report: Credit, Housing Market Woes Slam Mortgage Insurance Industry

September 8, 2008

The mortgage guaranty insurance industry experienced extremely high losses and negative operating returns in 2007 as mortgage defaults and foreclosures climbed rapidly. This was a sharp contrast to the record years of profitability earlier in the decade, during which most mortgage insurance companies added to their capital base, enabling them to better withstand the subsequent downturn in the housing market cycle, reported analysts in a new report.

The report, “A.M. Best Special Report: Credit, Housing Market Woes Slam Mortgage Insurance Industry,” says the accelerating defaults and subsequent foreclosures — started primarily in the subprime mortgage segment in the second half of 2006 — were the immediate causes for the 2007 downturn in the mortgage insurance industry’s operating performance.

— The tremendous negative impact on the mortgage insurance industry can be measured by the reported 2007 industrywide combined ratio of 141.3, as compared with the five-year average of 87.7 and the 10-year average of 75.4.

— The loss and loss adjustment expense (LAE) ratio was 116.1 in 2007, compared with 47.6 in 2006 and the five-year average of 62.9.

— Furthermore, investment income could not offset the shortfall in underwriting losses in 2007, shown by an operating ratio of 120.4, compared with the five-year average operating ratio of 64.9.

— The industry’s capital position deteriorated in 2007 driven by significant operating losses incurred with a negative total return on equity (ROE) of nearly 28 percent posted for the year. The increase in the net underwriting leverage ratio, from 2.9 in 2006 to 4.1 in 2007, was a key signal.

Source: A.M. Best Co.,

Topics Market

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