Mortgage insurers: Loss leaders

One of the remarkable stories in P&C insurance this year is the travail of mortgage insurers, and first-half results from yesterday confirmed it.

As homeowners know, lenders typically require a 20% down payment before they will issue a mortgage. However, if a buyer can’t summon that much cash, mortgage insurers cover the gap between the what the buyer puts down and the 20%. (Obviously, what got covered went kind of crazy during the housing bubble, but that’s still the general idea.)

This was pretty sleepy business till the housing bubble burst. The insurer collected the premium but didn’t have to worry about losses. People didn’t want to lose the equity in the home, so made sure they kept up with payments.

And even if there were defaults, the mortgage insurers had the law of large numbers working for them. Individual defaults were more or less independent events, so if you wrote enough business, results were stable.

By now, you know where I’m going: People who owe more than their houses are worth can, often, walk away. And a nationwide housing collapse has meant there’s no way to diversify the portfolio to bring stability.

And you can see it in the results.

Ugh - as in ugly

These days, P&C industry results are routinely presented with and without mortgage insurers – their impact is that great. This table shows that if you exclude mortgage insurers, return on surplus this year goes up to 7.5% from 6.3% – more than a percentage point. Remarkable for a bit player (about 1% of industry premium), but that’s what happens when your return is -43%. (italics mine and anyone else who really thinks about this)

A negative 43% return is a dog anywhere – except among mortgage insurers, where this is an improvement. First half last year returned -76%.

And their getting squeezed by the government. The FHA also sells mortgage insurance, and its rates are lower than the private companies. FHA rates are due to rise next month, so that will help.

I’ve skimmed the surface here, but Insurance Network News has more.


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