Post on 01-Jan-2016
May 22, 2001
2003 CAS Annual MeetingPrivate Mortgage Insurance
Industry Update
Presented by: Kyle Mrotek, A.C.A.S., M.A.A.A.New Orleans, LANovember 12, 2003
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Private Mortgage Insurance (PMI) Industry Update
Activities Reinsurance, Bulk Transactions, GSE’s
RegulatoryTaxes, RESPA Reform, GSE Reform
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PMI Industry UpdateActivities
ReinsuranceCatastrophe protectionCaptive reinsurance
Banks and mortgage lenders establish captive reinsurance companies
Captive reinsurers assume mortgage insurance risk on loans originated by lender and affiliates
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PMI Industry UpdateActivities
Reinsurance (cont.)Captive reinsurance (cont.)
Captive mortgage reinsurance is only about 10 years old
Captives typically monoline like primary companies
Isolated trust for each cedantMuch growth, both in captive counts and
premium ceded
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PMI Industry UpdateActivities
Reinsurance (cont.)
Number of Lender Reinsurer Trusts with Ceded PremiumIndustry (excluding one company) 1998-2002
70
140
185 195
252
3467
89 94112
0
50
100
150
200
250
300
1998 1999 2000 2001 2002
Calendar Year
Nu
mb
er o
f C
apti
ves
Total Trusts
LenderReinsurers
Source: Schedule F
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PMI Industry UpdateActivities
Reinsurance (cont.)Dollars of MI Premium Ceded to Lender Reinsurers
Industry (excluding one company 1998-99) 1998-2002 ($Million's)
4397
213
313
442
0
100
200
300
400
500
1998 1999 2000 2001 2002
Calendar Year
$Mil
lion
's o
f Pre
miu
m
Source: Schedule F
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PMI Industry UpdateActivities
Reinsurance (cont.)
Percentage of MI Premium Ceded to Lender ReinsurersIndustry (excluding one company 1998-99) 1998-2002
1.8%
4.3%
7.4%9.3%
11.7%
0.0%2.0%4.0%6.0%8.0%
10.0%12.0%14.0%
1998 1999 2000 2001 2002
Calendar Year
Per
cent
age
of P
rem
ium
Source: Schedule F
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PMI Industry Update Activities
Reinsurance (cont.)Captive reinsurance (cont.)
Typically aggregate excess of loss contracts Example: Reinsurer assumes layer 5%
excess 5% of coverage for 25% of written premium
Quota share contracts exist too, but less frequent
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PMI Industry Update Activities
Reinsurance (cont.)Captive reinsurance (cont.)
Cede trends Began relatively small (e.g., layers of
coverage for 15%-16% of written premium)
Trended to deeper cedes (e.g., layers of coverage for 35%-40% of written premium)
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PMI Industry Update Activities
Reinsurance (cont.)Captive reinsurance (cont.)
Cede trends (cont.) More recently, industry leaders announce
intent to reduce cede %’s
– Reasons cited
o Risk/reward balance, and
o Profitability objectives
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PMI Industry Update Activities
Bulk TransactionsLoan-level coverage written on pools of loans,
often for securitization marketReporting of bulk transactions beginning 3rd
quarter 2001, so little history available.Large portion of involvement based on subprime
loans (source: Inside Mortgage Finance)
Analysts keeping close eye on bulk losses
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PMI Industry Update Activities
Bulk Transactions (cont.)Bulk business as percent of MI industry’s new
insurance written12% for 2nd half, 200116% for 2002
MGIC, UGC, Radian and PMI bulk primary MI market leadersBulk primary MI in 2002
MGIC represents 25% UGC represents 19%
Source: Inside Mortgage Finance
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PMI Industry Update Activities
Government Sponsored Enterprises (GSE’s)Fannie Mae (formerly known as Federal National
Mortgage Association)Freddie Mac (formerly known as Federal Home
Loan Mortgage Corporation )
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PMI Industry Update Activities
GSE’s (cont.)Fannie Mae and Freddie Mac
Quasi-governmental agenciesPublicly owned corporationsRepresent roughly half of secondary mortgage
marketCompete against each other, as well as other
entities Enjoy implied governmental backing, so lower
borrowing ratesSource: Residential Mortgage Lending
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PMI Industry Update Activities
GSE’s (cont.)GSE Regulation
Office of Federal Housing Enterprise Oversight (OFHEO) regulates Fannie Mae and Freddie Mac
OFHEO established by Department of Housing and Urban Development (HUD) in 1992
Source: OFHEO website
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PMI Industry Update Activities
GSE’s (cont.)OFHEO’s mission - ensure the capital adequacy
and financial safety and soundness of Fannie Mae and Freddie MacFunded through assessments to Fannie Mae
and Freddie Mac, so not funded by taxpayers
Source: OFHEO website
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TaxesTax deductibility of PMI
Mortgage insurance premiums proposed to be tax-deductible from federal income taxes
Deduction to apply to homeowners whose adjusted gross income is $100,000 or less
Argument is MI premium should be tax deductible because lenders, not homeowners, benefit from MI
Source: Inside Mortgage Finance
PMI Industry UpdateRegulatory
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Taxes (cont.)Tax deductibility of PMI (cont.)
Expected to allow “some 300,000 families, who now rent, to qualify for a mortgage” (American Homeowners Association)
Predicted tax savings up to $700 on $135,000 loan (Milwaukee Journal Sentinel)
MI industry in favor to “help level the playing field for private mortgage insurers against 80-10-10 loans” (Inside Mortgage Finance)
PMI Industry UpdateRegulatory
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Taxes (cont.)Tax deductibility of PMI (cont.)
Bi-partisan provision introduced March 2003, but cut by President Bush in final version of tax bill in June 2003
PMI Industry UpdateRegulatory
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RESPA ReformRESPA – Real Estate Settlement Procedures Act
(current version since 1992)Purpose: To inform borrowers of the costs
associated with their loan and loan closingRequires lender to provide borrower with
good faith estimate of the settlement costsProhibits kickbacks and unearned feesReason for some disclosure documents
received during loan closing processSource: Residential Mortgage Lending
PMI Industry UpdateRegulatory
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RESPA Reform (cont.)RESPA reform proposed
Provides safe haven from anti-kickback and unearned fees provision for Guaranteed Mortgage Packages (GMP) Packaging could save consumers in closing
costs Imposes tolerance levels in good-faith
estimatesStipulates lender-paid mortgage broker
compensation as credit to borrowerSource: Mortgage Banking, February 2003
PMI Industry UpdateRegulatory
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GSE ReformTreasury and HUD want Treasury to assume
from HUD regulatory role of GSE’sHUD interested in maintaining authority of
establishing affordable housing goals
PMI Industry UpdateRegulatory
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GSE Reform (cont.)OFHEO too small to effectively oversee actions
of GSE’sFreddie Mac underreported earnings by $4.5
billion over 3 yearsFannie Mae committed “computational error”
of over $1 billionGSE’s have looser disclosure standards than
other publicly traded firms
PMI Industry UpdateRegulatory
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GSE Reform (cont.)Parties for reform (i.e., lenders, banks)
Lower borrowing costs (implied government backing)
GSE’s enjoy too many benefits not permitted to competitors (Over $2 billion emergency crisis line of credit)
Operating leverage too high, could compromise economy if default (less stringent risk-based capital standards)
PMI Industry UpdateRegulatory
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GSE Reform (cont.)Parties against reform (i.e., GSE’s)
Provide savings to consumer in borrowing costs (according to Congressional Budget Office, 25 basis points)
Provide liquidity for securitization marketFinalization of reform not expected before year-
end
PMI Industry UpdateRegulatory
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PMI Industry UpdateClosing Remarks
Large political involvement Industry constantly evolving
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Private Mortgage Insurance
Q&A