Mortgage credit has been one of the most “compelling value propositions” for the reinsurance industry in the past couple of years,” Jeff Krohn, managing director at Guy Carpenter told The Insurer on a thundery Tuesday morning in Monte Carlo.
The scene on the Hôtel Metropole terrace was one that was wet, gloomy and thundery, but the conditions in the mortgage credit business are quite the opposite, according to Krohn.
“Guy Carpenter’s analysis of the deals going forward [are] projecting that in a base-case scenario of the GSE Credit Risk Transfer (CRT) transactions, all layers, all treaties issued to date are likely to be profitable so it really has been one of the best lines of business to write in the last couple of years and we think so going forward as well,” he said.
As mortgage credit business is not materially correlated to other lines of business, it allows reinsurers to dampen the volatility of their earnings as well as reduce the required ratings agency capital they hold for all the lines of business they write.
In addition, credit quality remains historically strong and Krohn said more guardrails are now in place to ensure that continues through the cycle. “The performance to date has really been reflective of that high credit quality,” he said.
According to Krohn there have been several developments in the last 10 years that have helped the mortgage segment.
Talking about the GSEcredit risk transfer segment, Krohn said, “The watershed development was the [Federal Housing Finance Agency] FHFA mandating the to use the capital markets and the reinsurance markets to establish the credit risk transfer programme.”
Following this development, new capital regulations for US mortgage insurers created additional demand for reinsurance. “The private mortgage eligibility requirements had set the capital standards and recognised reinsurance as capital,” explained Krohn. “So, from the GSE perspective [and] from a PMI perspective, there are capital regulations driving the need for reinsurance.”
One of most meaningful developments has been the release of historical GSE performance data at a loan level. “ These very rich data sets going back 20 years are now in the public domain. These data sets allow reinsurers to evaluate the risk historically and develop modelled view going forward,” he said.
As a result of these these developments, Krohn said the growth of the CRT market has been “tremendous with over $22 Billion in limit placed to date”.
“From 2013 through 2019 there will have been 92 transactions issued. In this last year alone there have been 20 transactions and if you let those premiums play out, going all the way back, you’ll have about $5.9bn of premium for the reinsurance market,” he said.
“In the PMI space in the US, you’ve had 27 transactions that have been issued and there’s another 30-40 percent of premium there. Internationally, there are about half a dozen programmes that are being placed, so from a growth perspective, reinsurers can choose from these different segments and compile a nice diversified portfolio of mortgage credit business,” he added.
On the subject of the role of managing general underwriters (MGUs) as a gateway to the mortgage space for general reinsurers, Krohn said that in the GSE/CRT space it will be “pretty significant”.
“What needs to be done is that the knowledge gap needs to be closed. Brokers can help with that as well as MGUs, but the brokers, at the end of the day, represent the clients. We’re happy to sit down with the reinsurers, educate them on the process, but the MGUs really represent the reinsurers,” he said.
According to Krohn, today, there are four MGUs or advisors in the business of advising global reinsurers. Two have mortgage insurers, Essent and Arch MI, and Trans Re is a global reinsurer. Additionally, Milliman is very sophisticated actuarial firm offering this service. Each bring their own unique perspective and stand ready to support reinsurers investigating and participating in the mortgage credit space. These MGUs bring expertise, help shorten the evaluation process and offer a cost-effective alternative to building expertise internally.