Financial services ratings agency Moody’s has revised its outlook for the U.S. mortgage insurance sector to stable from positive, in light of moderated macroeconomic conditions through an extended economic cycle.
Moderating macroeconomic conditions are expected as a result of slowing economic growth and forecasts for higher unemployment in the U.S., says Moody’s.
In recent times, mortgage insurers in the U.S. have made greater use of reinsurance protection from both the traditional market and increasingly the capital markets through the utilisation of insurance-linked notes.
Despite the fact that this increased use of reinsurance mitigates the impact of an adverse economic landscape for mortgage insurers, offering a potentially more flexible and cost effective source of capital, the ratings agency has revised the sector’s outlook to stable from positive for 2020 amid slowing economic growth.
James Eck, Moody’s Vice President, commented: “Our stable outlook is underpinned by the transformation of the sector’s risk profile over the past several years due to the increased utilization of reinsurance, which will mitigate the impact of an adverse economic environment on mortgage insurers’ earnings and capital.”
Moody’s highlights that for some time now, some participants in the U.S. mortgage insurance space have leveraged predictive modelling technology to differentiate pricing. However, this year is the first time that “black-box” risk-based pricing engines have been used across the sector. The ratings agency notes that the adoption of a more granular pricing model is credit positive for the sector, but warns that it could result in pricing competition.
“The outlook indicates a forward-looking assessment of fundamental credit conditions that will affect the creditworthiness of the mortgage insurance industry over the next 12-18 months,” explains Moody’s.
As tracked by our insurance-linked securities (ILS) focused sister-site, Artemis, the volume of mortgage ILS transactions has increased dramatically since the first deal came to market in 2015.
The Artemis Deal Directory shows that since 2015, the mortgage ILS market has seen more than $8.4 billion of issuance, and shows no sign of slowing anytime soon.
