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Mortgage reinsurance seen as ‘bright spot’

Eyeing mortgage reinsurance risk: S&P Global Ratings Services senior director Taoufik Gharib

Mortgage reinsurance is turning out to be a bright spot in a tough reinsurance market and the growth trend is set to continue, according to a top industry analyst.

But Taoufik Gharib, senior director at S&P Global Ratings, added that reinsurers with growing exposure to this business would have to carefully monitor the underlying housing market to ensure they can manage risks which could impact their investments as well as their underwriting results.

Mortgage reinsurance will be one of the topics discussed at Bermuda Reinsurance conference, presented by S&P and PwC, at the Hamilton Princess today.

“Mortgage reinsurance has been one of the bright spots in the market,” Mr Gharib said in an interview.

“There will be further opportunities but reinsurers will need to manage the cycle.

“Pricing is good now, but in two or three years, the premiums could be shrinking as competition grows and third-party capital starts to come in.”

Much has changed since the US housing market collapse sparked a global financial crisis in 2008. Lenders have significantly tightened up their underwriting standards, Mr Gharib said, while the improving fundamentals of the housing market have also attracted investors.

Demand for mortgage reinsurance is increasing. While private mortgage insurers (PMIs) are looking to shore up their capital, government-sponsored entities (GSEs) Fannie Mae and Freddie Mac, have been mandated to transfer more of their risk to the private sector. Both agencies have been in conservatorship for the past eight years, since the US Government stepped in to bail them out in September 2008.

But Mr Gharib said reinsurers wading into the growing market should be mindful of the recent history of the US housing sector and be aware of the risks to their wider business.

“Just as with any new product, reinsurers will have to do their homework and analysis,” he said. “They’ll need to look at how this business will correlate with other lines and also with their assets, as many reinsurers have investments in residential mortgage-backed securities.

“The reinsurers will have to ensure they have the capabilities to track the mortgage securities in the US. They are two steps away from the underlying risk and they need to have the technology and the data to follow this risk.”

Of the Bermudian companies, insurer and reinsurer Arch Capital has an advantage, Mr Gharib said, as it has its own mortgage insurance company that is one step closer to the underlying risk.

Meanwhile, Mr Gharib said alternative capital, which Aon Benfield has estimated has grown to around $75 billion, or more than 12 per cent of global reinsurance capital, was “here to stay”.

However, he cautioned that insurance-linked securities had not been tested and that some of the capital could leave in certain circumstances. For example, a destructive category 5 hurricane hitting Florida, a catastrophe of unexpected magnitude or characteristics, or an environment of rising interest rates making ILS relatively less attractive.

He added that the institutional investors that dominated the investor base of ILS, were sophisticated enough to fully understand the risk inherent in ILS.

“Some fund managers are looking at getting retail investors involved,” Mr Gharib said. “The concern for the future is that in the event of a major loss, less sophisticated retail investors would get out.”

Most of Bermuda’s traditional reinsurance companies have created their own third-party capital management arms to boost their underwriting capacity and to generate fee income. However, alternative capital’s growth had taken market share away from traditional reinsurers in a slow-growth reinsurance market, Mr Gharib added.