Outlooks On Five U.S. Private Mortgage Insurers Revised To Negative Due To Elevated Credit Risk From COVID-19

  • A sudden shock to the U.S. economy will raise mortgage delinquencies, potentially leading to private mortgage insurers recognizing higher credit losses.
  • Strong underwriting and pricing since the 2008 financial crisis, and better capitalization supported by higher utilization of reinsurance heading into 2020, provide some cushion.
  • However, there is still uncertainty on the level of delinquencies and ultimate losses in the case of a prolonged recession.
  • Increased mortgage refinancing and potential higher reinsurance costs, on whatever capacity that may be available, would further squeeze margins and pressure capitalization.
  • As a result, we are revising our outlook to negative from stable on the U.S. private mortgage insurance sector and its key insurers.
TORONTO (S&P Global Ratings) March 26, 2020--S&P Global Ratings today said it revised its outlook to negative from stable on four U.S. private mortgage insurers and their subsidiaries: Arch Capital Group Ltd.; Essent Guaranty Inc.; MGIC Investment Corp.; and Radian Group Inc. S&P Global Ratings revised its outlook to negative from positive on NMI Holdings Inc.
At the same time, we have affirmed our issuer credit ratings (ICR) on each holding company and its subsidiaries, and financial strength ratings (FSR) on insurance operating subsidiaries:
  • Arch Capital Group Ltd.: A-/Negative
  • Essent Guaranty Inc.: BBB+/Negative FSR and ICR (the holding company is not rated)
  • MGIC Investment Corp.: BB+/Negative
  • NMI Holdings Inc.: BB/Negative
  • Radian Group Inc.: BB+/Negative
The ratings on Genworth Mortgage Insurance Corp. remain on CreditWatch with developing implications, where they were placed Sept. 26, 2018.
The U.S. private mortgage insurers (PMIs) are facing the prospect of much higher losses as uncertainty abounds with the current state of the U.S. economy. S&P Global Ratings is projecting a sharp GDP contraction in the second quarter of 2020 of almost double the 6% from last week's estimate and a contraction in the first quarter as well, due to containment measures undertaken to stop the outbreak of COVID-19. There is a high degree of uncertainty about the size of the downside risk and the path of recovery will depend on the outbreak containment, the government's policy responses, and any resulting lasting damage to the economy.
The focus on containment and lockdown of large swaths of the population is leading to a sudden slump in consumer spending, leading to a jump in unemployment, which could be higher than originally anticipated in our economic projections. Higher mortgage payment delinquencies would naturally follow. PMIs would have to recognize these delinquencies through their earnings and loss reserves. Although, in considering the unique nature of the economic crisis, we do not know the level of delinquencies that may come through, the ultimate cure activity on these delinquencies, and the severity on the defaulted loans. In general, mortgage vintages reach peak loss in three to four years after origination, so the robust mortgage originations of recent years (2017-2019 constituted 63% of the total portfolio on average) are particularly at risk because first-time home buyers are usually a bigger proportion of a PMI's portfolio, and they usually have not built up their savings. Certain PMIs with lingering exposures from pre-2009 vintages would also be more exposed. We believe that, unlike in the 2008 Great Recession, this time the housing market is fairly valued and any possible negative impact on house prices due to curtailment of purchase originations activity may not be as material, at least in the near term. This would provide less of an incentive for the borrowers to walk away, partially offsetting our view of these risks.
The negative outlook reflects the impact economic and market uncertainty could have on the loss experience and risk-adjusted capitalization of the PMIs. We recognize that there is a higher degree of uncertainty and a growing downside risk, which may lead to rating actions over the next two quarters.
We could lower our ratings on the PMIs during the next two quarters if the COVID-19 impact drives a significant increase in unemployment resulting in higher mortgage delinquencies. This could become a capital event, which could ultimately weaken the PMIs' risk-adjusted capitalization relative to our ratings expectations, exacerbated by the potential scarcity of reinsurance capacity (including ILN).
We could affirm the ratings and revise the outlooks back to stable if:

  • Losses are largely contained within PMIs' earnings;
  • Reinsurance structures and risk management perform as expected; and
  • Risk-adjusted capitalization remains supportive of our current ratings.
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