III - Property/Casualty: Specialty Lines

INSURANCE

PROPERTY INSURANCE REQUIREMENTS FOR MORTGAGORS

Some lenders require borrowers to purchase homeowners insurance or other property insurance. Several states have passed laws that prohibit mortgage lenders from requiring a borrower to obtain property insurance coverage that exceeds the replacement value of the buildings and structures on the property as a condition for the loan. These states include Arizona, California, Connecticut, Georgia, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Tennessee and Virginia. In states without such a law, borrowers might be forced to take out more coverage than they could be compensated for, as homeowners insurance only covers rebuilding costs, not the value of the land, in the event of a catastrophic fire or other covered peril.

MORTGAGE GUARANTY INSURANCE

Private mortgage insurance (PMI), known as mortgage guaranty insurance, guarantees that, in the event of a default, the insurer will pay the mortgage lender for any loss resulting from a property foreclosure up to a specific amount. PMI, which is purchased by the borrower but protects the lender, is sometimes confused with mortgage insurance, a life insurance product that pays off the mortgage if the borrower dies before the loan is repaid. Banks generally require PMI for all borrowers with down payments of less than 20 percent. The industry’s losses rose in 2007, reflecting the economic downturn and the subsequent rise in mortgage defaults.

MORTGAGE GUARANTY INSURANCE, 2003-2007 (1)

($000)

	2003	2004	2005	2006	2007
Net premiums written	$3,482,519	$3,411,062	$3,480,174	$3,541,558	$4,180,226
Net premiums earned	3,385,414	3,476,019	3,454,232	3,584,255	4,019,423
Losses	870,861	1,336,605	1,251,554	1,461,243	5,412,163
Expenses	787,649	820,268	842,483	858,599	807,643
Underwriting income/loss	1,375,427	1,319,146	1,360,195	1,264,413	-2,200,384
Loss ratio	25.72%	38.45%	36.23%	40.77%	134.65%
Expense ratio	22.62	24.05	24.21	24.24	19.32
Combined ratio	48.34	62.50	60.44	65.01	153.97
(1) As reported by members of the Mortgage Insurance Companies of America, representing six private mortgage insurance companies in 2003-2006 and five in 2007. Source: Mortgage Insurance Companies of America.

TOP TEN MORTGAGE GUARANTY INSURANCE GROUPS/COMPANIES
BY DIRECT PREMIUMS WRITTEN, 2007 (1)

Rank	Group/Company	Direct premiums written	Market share
1	MGIC Group	$1,487,489,519	24.4%
2	Radian Group	1,026,923,234	16.9
3	PMI Group	970,961,090	16.0
4	American International Group (AIG)	788,734,840	13.0
5	Genworth Financial Group	754,684,131	12.4
6	Old Republic Group	637,957,000	10.5
7	Collateral Holdings Group	339,006,491	5.6
8	CUNA Mutual Group	81,101,368	1.3
9	Southern Pioneer Property and Casualty Insurance Co.	297,390	(2)
10	Aztec Insurance Company	23,891	(2)
(1) Before reinsurance transactions, excluding state funds. (2) Less than 0.1 percent. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.

TITLE INSURANCE

Title insurance protects the owner of property or the holder of a mortgage against loss in the event of a property ownership dispute.

TITLE INSURANCE, 1998-2007

($000)

Year	Net premiums written	Annual percent change	Year	Net premiums written ($000)	Annual percent change
1998	8,208,805	NA	2003	17,036,936	31.0%
1999	8,734,482	6.4%	2004	16,790,137	-1.4%
2000	7,820,139	-10.5%	2005	18,231,521	8.6%
2001	9,949,587	27.2%	2006	17,908,679	-1.8%
2002	13,004,693	30.7%	2007	15,613,477	-12.8%
NA=Data not available. Source: American Land Title Association.

SURETY BONDS

Some kinds of insurance provide financial guarantees. The oldest type, a personal contract of suretyship, dates back to biblical times, when one person would guarantee the creditworthiness or the promise to perform of another. Surety bonds in modern times are primarily used to guarantee the performance of contractors.

A surety bond is a contract guaranteeing the performance of a specified obligation. Simply put, it is a three-party agreement under which one party, the surety company, answers to a second party, the owner, creditor or “obligee,” for a third party’s debts, default or nonperformance. Before it issues the bond, the insurer investigates the background and financial condition of the contractor to satisfy itself that the firm is capable of doing the job as set out in the contract. If the contractor fails to perform, the surety company is obligated to get the work completed or pay for the loss up to the bond “penalty.” Surety bonds are generally required on large federal, state and local public works projects.

SURETY BONDS, 1998-2007

($000)

Year	Direct premiums written	Annual percent change	Year	Direct premiums written	Annual percent change
1998	$3,256,713	9.3%	2003	$3,897,844	1.0%
1999	3,570,043	9.6	2004	4,274,044	9.7
2000	3,506,666	-1.8	2005	4,498,167	5.2
2001	3,591,747	2.4	2006	5,041,185	12.1
2002	3,858,824	7.4	2007	5,450,432	8.1
Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.

TOP TEN SURETY GROUPS
BY DIRECT PREMIUMS WRITTEN, 2007 (1)

Rank	Group	Direct premiums written	Market share
1	Travelers Group	$1,007,035,468	18.8%
2	Zurich Insurance Group	444,044,250	8.3
3	Safeco Insurance Group	423,274,038	7.9
4	Liberty Mutual Insurance Group	340,812,681	6.4
5	CNA Insurance Group	327,216,846	6.1
6	Chubb & Son Inc. Group	294,952,541	5.5
7	Hartford Fire & Casualty Group	223,056,687	4.2
8	HCC Insurance Holdings Group	193,316,983	3.6
9	Arch Capital Group	127,081,596	2.4
10	Ace Limited Group	115,608,012	2.2
(1) Before reinsurance transactions, excluding state funds. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.

FINANCIAL GUARANTY INSURANCE

Financial guaranty insurance, also known as bond insurance, helps expand the financial markets by increasing borrower and lender leverage. Starting in the 1970s, surety bonds began to be used to guarantee the principal and interest payments on municipal obligations. This made the bonds more attractive to investors and at the same time benefited bond issuers because having the insurance lowered their borrowing costs. Initially, financial guaranty insurance was considered a special category of surety. It became a separate line of insurance in 1986.

Financial guaranty insurers are specialized, highly capitalized companies that traditionally have had the highest rating. The insurer’s high rating attaches to the bonds, lowering the riskiness of the bonds to investors. With their credit rating thus enhanced, municipalities can issue bonds that pay a lower interest rate, enabling them to borrow more for the same outlay of funds.

Over the years financial guaranty insurers have expanded their reach beyond municipal bonds and now insure a wide array of products, including mortgage-backed securities, pools of credit default swaps and other structured transactions. Recent problems in the credit markets have taken a toll on financial guaranty insurers, as they confront heavy losses related to these structured instruments.

FINANCIAL GUARANTY INSURANCE, 1998-2007 (1)

($000)

Year	Direct premiums written	Annual percent change
1998	$1,491,257	20.9%
1999	1,553,400	4.2
2000	1,607,646	3.5
2001	2,189,729	36.2
2002	3,118,469	42.4
2003	3,911,580	25.4
2004	3,608,473	-7.7
2005	3,658,375	1.4
2006	3,413,969	-6.7
2007	3,555,262	4.1
(1) Before reinsurance transactions, excluding state funds. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.

DIVERSIFICATION OF THE BOND INSURANCE MARKET

The leading municipal bond insurers have diversified since their inception and now provide insurance and reinsurance for corporate bonds and other forms of credit as well as for foreign government and corporate borrowings. They have also become insurers of asset-backed securities, pools of credit default swaps and other structured financial transactions. U.S. public finance bonds, which include municipal bonds, still account for most of their business.

TYPES OF BONDS INSURED BY FINANCIAL GUARANTY INSURERS, 2007 (1)

(1) Net par outstanding, December 31, 2007.

Source: Association of Financial Guaranty Insurers.

TOP TEN FINANCIAL GUARANTY INSURANCE GROUPS/COMPANIES
BY DIRECT PREMIUMS WRITTEN, 2007 (1)

Rank	Group/Company	Direct premiums written	Market share
1	Ambac Assurance Group	$791,594,649	25.4%
2	MBIA Group	631,527,782	20.2
3	Financial Security Assurance Group	618,398,728	19.8
4	PMI Group	306,101,620	9.8
5	XL America Group	254,319,008	8.2
6	Radian Group	193,075,167	6.2
7	ACE Ltd. Group	150,057,759	4.8
8	ACA Financial Guaranty Corp.	95,907,150	3.1
9	CIFG Assurance North America Inc.	74,177,674	2.4
10	First Nonprofit Mutual Insurance Company	2,758,134	0.1
(1) Before reinsurance transactions, excluding state funds. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.

CREDIT INSURANCE FOR CUSTOMER DEFAULTS

Credit insurance protects merchants, exporters, manufacturers and other businesses that extend credit to their customers from losses or damages resulting from the nonpayment of debts owed them for goods and services provided in the normal course of business. Credit insurance facilitates financing, enabling insured companies to get better credit terms from banks.

CREDIT INSURANCE, 2003-2007 (1)

($000)

Year	Direct premiums written	Annual percent change
2003	$869,543	18.8%
2004	1,053,996	21.2
2005	1,206,020	14.4
2006	1,398,762	16.0
2007	1,768,912	26.5
(1) Before reinsurance transactions, excluding state funds. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.

TOP TEN CREDIT INSURANCE GROUPS/COMPANIES
BY DIRECT PREMIUMS WRITTEN, 2007 (1)

Rank	Group/Company	Direct premiums written	Market share
1	American International Group	$304,322,488	17.8%
2	Old Republic Group	232,729,765	13.6
3	Allianz Insurance Group	169,871,308	9.9
4	American National Financial Group	126,132,510	7.4
5	Allstate Insurance Group	114,464,738	6.7
6	Aegon U.S. Holding Group	90,368,687	5.3
7	Swiss Reinsurance Group	81,528,506	4.8
8	Coface North American Insurance Co.	68,913,029	4.0
9	Protective Life Insurance Group	63,553,009	3.7
10	Service Life Group	50,063,204	2.9
(1) Before reinsurance transactions, excluding state funds. Source: National Association of Insurance Commissioners (NAIC) Annual Statement Database, via Highline Data, LLC. Copyrighted information. No portion of this work may be copied or redistributed without the express written permission of Highline Data, LLC.