Booming Housing Market Plus Low Interest Rates Boost Reinsurance and Private Mortgage Insurance
Private mortgage insurance has grown 19% from 2016 to 2020, reaching $6.4 billion in 2020, according to AM Best.
- Meg Green
- September 2021
Low interest rates and rising home prices are driving growth in private mortgage insurance. As the line has grown, so too has the PMI writers' reliance on reinsurance—especially reinsurers in Bermuda.
PMI reached record levels in 2020, and while it is projected to be lower this year, it may still be the second highest in history, said Wai Tang, senior director, AM Best.
“The U.S. private mortgage insurance market performed better than we expected when the U.S. got into the pandemic,” Tang said.
While the unemployment rate spiked early on in the COVID-19 pandemic in 2020, rates improved quickly, Tang said. The GDP bounced back after the initial shock of the pandemic, he said. Americans also doubled their savings from about 7% 10 years ago to 15% today, Tang said.
“All of this is contributing a positive factor to the industry,” Tang said.
Those macroeconomic conditions tied with interest rates that remain at historic lows and a booming housing market have fueled mortgage refinancing and mortgage originations, he said.
PMI reached record levels in 2020, and while it is projected to be lower this year, it may still be the second highest in history.
The PMI Factor
PMI “plays a critical role in making homeownership possible for many Americans,” said John Huff, president and chief executive officer of the Association of Bermuda Insurers and Reinsurers. “It simply eases the burden of putting that down payment together which is so important for homeownership and also to build wealth. It allows Americans from all ways of life to get a home more quickly.”
PMI has grown 19% from 2016 to 2020, reaching $6.4 billion in 2020, according to AM Best.
As PMI has grown, the business also has shifted to rely on reinsurance more. About 30% of PMI is reinsured today, compared to about 14% 20 years ago.
Private mortgage insurers used to “employ a buy-and-hold strategy, which means that only a fairly limited amount of the businesses was ceded to the traditional reinsurance market. The majority of this risk was held on [insurers'] own balance sheets,” Tang said.
The new updated Private Mortgage Insurer Eligibility Requirements in 2015 may be helping to fuel that change, he said.
Private mortgage insurers are required to carry more capital under the updated eligibility requirements, which mortgage insurers need to meet to insure loans acquired by Fannie Mae and Freddie Mac. The regulations increased capital requirements from 4% of risks carried to 7%-8% of risks carried to ensure that private mortgage insurance companies have adequate liquidity and claims-paying capacity during periods of economic stress, according to the U.S. Mortgage Insurers' website.
In addition to traditional reinsurers, private mortgage insurers also have turned to the capital markets to shift some risk from their balance sheets. Mortgage insurance-linked securities have grown from less than a third of a billion dollars in 2015 to just shy of $5 billion in 2020, according to Artemis.
Much of both the traditional reinsurance and ILS business has found a home in the Bermuda market, Huff said.
“Bermuda had about 30% of that reinsurance for private mortgage insurance in 2016. The most recent data from 2020 shows that over half of that mortgage reinsurance is protected by Bermuda's strong reinsurance market,” Huff said.
“It's a number we're very proud of—the Bermuda market helping Americans with homeownership. Such an important issue, particularly in minority communities where the ability to accumulate wealth in the first generation, buying a home is so important in that area,” Huff said.
AM Best has a negative outlook on the U.S. mortgage insurance market over concerns including the potential for further lockdowns if the various variants of the COVID-19 virus continue to spread and the potential spike in defaulted loans at the end of the forbearance periods in September.
“Despite that, there are some mitigating measures that we think may position PMI insurers for a solid comeback once the pandemic eases,” Tang said.
Those factors include: strong mortgage underwriting standards; the better risk-adjusted capital position of private mortgage insurers; the federal government's stimulus program; forbearance programs offered by the Federal Housing Administration; lower-than-expected delinquencies; and a rebound in the mortgage-linked securities market.
“We are watching it very closely, and we may revisit the outlook soon,” Tang said.