Reinsurers warm to mortgage risk
Pricing in the mortgage credit risk market has reduced significantly in recent years, but it remains a very profitable business for reinsurers, with more showing an interest in moving into this sector all the time, Joe Monaghan, executive managing director of Aon’s Reinsurance Solutions business, told PCI Today.
Freddie Mac and Fannie Mae, the US government-sponsored enterprises (GSEs) that provide liquidity to the US mortgage markets by buying mortgages from lenders, first transferred risks into the reinsurance sector in 2013. Between them, they now transfer some $5 billion of risk per year to around 40 reinsurers which play in this space.
They have also indicated they would be keen to build up the panel of reinsurers they work with further; an executive from Freddie Mac said in this publication yesterday that they would like to build the panel to around 50 reinsurers, the increase helping to ensure its credit risk transfer programme will remain stable and sustainable in the long term.
Monaghan said this will be achievable as more reinsurers grasp the benefits of diversification this line of business offers, its healthy levels of profitability—and they invest in the resources to move into this space as a result.
He said pricing has fallen due to a combination of increased competition between reinsurers, spreads falling on the equivalent risk transfer programme that moves the same risks into the capital markets via bonds, and the fact that the underlying portfolios have consistently performed so well.
“It has never come close to a loss; some portfolios have never even had a single mortgage default,” he said.
Even with pricing having fallen, the business is still giving reinsurers a return of around 14 or 15 percent, Monaghan said. “It was in the 20s but this remains a very attractive line of business,” he said.
He added that the barriers to entry to entering this line of business have also fallen as the availability of analytical tools and models to assess the risk has increased and expertise is now growing in the industry about how to understand and price the risks.
“New players may only be taking a 5 percent share on a treaty alongside another 25 reinsurers, many of which have extremely sophisticated risk modelling capabilities on this.
“That gives players reassurance; you have to understand the risk but you don’t have to make huge investments to get to the point you are comfortable,” Monaghan said.
He added that the underlying dynamics in the US housing market are very positive, with increases in the value of homes being driven by a shortage of suitable properties, mainly due to a shortage of labour—itself a hangover of the last financial crisis—as opposed to an abundance of liquidity in the market.
“All that is good for re/insurers taking on the risk; the sector is stable and the underlying dynamics positive,” he said.
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