While business conditions in traditional property/casualty reinsurance areas continue to deteriorate, U.S. mortgage reinsurance apparently remains a bright spot, due to government mandates and other factors.

The sector still offers healthy returns even as pricing begins to tighten, Standard & Poor’s said in a new report

“Opportunities in the U.S. mortgage business have provided reinsurers with some respite from deteriorating business conditions in traditional property/casualty reinsurance lines,” the S&P report noted. “The returns in the mortgage reinsurance business have been fairly healthy, which attracts an increasing number of players in the hopes of benefiting from still-decent margins helped by favorable macroeconomic conditions and thereby diversifying their business profile.”

Standard & Poors said that risk-adjusted returns will face some pressures as the market matures, participating insurers and reinsurers increase and the credit risk profile expands. But it sees solid returns in the months ahead, particularly for insurers and reinsurers that “participated early and built a portfolio of reinsurance deals” in the space.

Late-comers will have a harder time of generating similar margins, S&P said, but it said that the possibility remains.

Here are some additional report findings:

• Demand for mortgage reinsurance remains healthy, in part, because of government-sponsored entities such as Fannie Mae, Freddie Mac and GSEs, all of which have mandates to involve private capital to reduce taxpayers’ exposure. This trend has increased in recent years, according to the report.
• Risk adjusted returns to mortgage reinsurance offerings from Freddie Mac could be affected by factors such as the tranche structure and reference mortgage pool carve-out.
• S& P predicts that the hike in the number of insurers and reinsurers willing to provide capacity should be enough to maintain downward pressure on premium rates, even as the underlying mortgages continue to perform well.
• Mortgages from after 2008 have performed better than historical norms, and S&P expects this trend to continue for recent mortgages even with a slight spike in the number of mortgages with higher loan-to-value and lower credit scores. This, in turn will benefit both reinsurers and primary mortgage insurers, according to the report.

For this trend to continue, S&P said that risk management remains key, even as current healthy margins tighten. According to the report, reinsurers and insurers that understand the risk well and “can allocate limits by various layers and programs based on risk-reward analysis will stand to benefit despite some tightening.”

The full Ratings Direct report is called “U.S. Mortgage Reinsurance Continues to Shine, Though Pricing is Tightening.”

Source: Standard & Poor’s