Specialty Lines

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. 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.

LENDER PLACED INSURANCE

Sometimes, when a lender requires insurance on a mortgaged property and the borrower has not purchased coverage or has allowed it to lapse, the lender will take out a policy on the borrower’s behalf, with the borrower paying the premiums. So-called “force placed” or “lender placed” coverage is designed to ensure that if the mortgaged property is damaged, funding is available to repair it. This procedure protects the lender’s interest in the property. Lender placed insurance has recently come under scrutiny, with some state regulators looking into potential abuses of the practice by lenders. A similar product, lender placed auto insurance, comes into play when a creditor requires insurance as a condition for a car loan and the borrower allows his coverage to lapse.

MORTGAGE GUARANTY INSURANCE

Private mortgage insurance (PMI), also 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 life 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 combined ratio, a measure of profitability, deteriorated (i.e., rose) significantly in 2007 and 2008, reflecting the economic downturn and the subsequent rise in mortgage defaults. The combined ratio improved in 2009 and 2010 as conditions began to ease, but remains at high levels.

 

MORTGAGE GUARANTY INSURANCE, 2004-2013

($000)

Year Net premiums written (1) Annual percent change Combined ratio (2) Annual point change (3)
2004 $4,323,071 0.9% 75.6 8.0 pts.
2005 4,454,711 3.0 75.2 -0.4
2006 4,565,899 2.5 71.0 -4.2
2007 5,192,104 13.7 129.0 58.1
2008 5,371,878 3.5 219.8 90.8
2009 4,564,406 -15.0 201.9 -17.9
2010 4,248,798 -6.9 198.4 -3.6
2011 4,242,340 -0.2 219.0 20.7
2012 3,965,896 -6.5 189.7 -29.4
2013 4,329,947 9.2 98.0 -91.7

(1) After reinsurance transactions, excludes state funds.
(2) After dividends to policyholders. A drop in the combined ratio represents an improvement; an increase represents a deterioration.
(3) Calculated from unrounded data.

Source: SNL Financial LC.

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TOP TEN WRITERS OF MORTGAGE GUARANTY INSURANCE BY DIRECT PREMIUMS WRITTEN, 2013

($000)

Rank Group/company Direct premiums written (1) Market share (2)
1 Radian Group Inc. $1,032,326 22.7%
2 American International Group 994,646 21.9
3 MGIC Investment Corp. 989,915 21.8
4 Genworth Financial Inc. 583,010 12.8
5 PMI Group Inc. 375,545 8.3
6 Old Republic International Corp. 285,062 6.3
7 Essent US Holdings Inc. 186,201 4.1
8 Arch Capital Group Ltd. 99,245 2.2
9 NMI Holdings Inc. 3,541 0.1
10 ACE Ltd. 138 (3)

(1) Before reinsurance transactions.
(2) Based on U.S. total, includes territories.
(3) Less than 0.1 percent.

Source: SNL Financial LC.

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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. The downturn in the realty market triggered a sharp drop in premiums in 2007 and 2008.

 

TITLE INSURANCE, 2002-2011

($000)

Year Net premiums written  Annual percent change Year Net premiums written  Annual percent change
2002 $13,004,693 30.7% 2007 $14,227,111 -14.1%
2003 17,036,936 31.0 2008 9,920,074 -30.3
2004 15,578,889 -8.6 2009 9,289,174 -6.4
2005 16,939,278 8.7 2010 9,422,050 1.4
2006 16,568,820 -2.2 2011 9,157,906 -2.8

Source: American Land Title Association.

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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, 2004-2013

($000)

Year Net premiums written (1) Annual percent change Combined ratio (2) Annual point change (3)
2004 $3,802,893 12.6% 120.6 -0.5 pts.
2005 3,817,496 0.4 102.1 -18.5
2006 4,434,780 16.2 81.5 -20.6
2007 4,779,117 7.8 72.2 -9.3
2008 4,960,250 3.8 67.0 -5.2
2009 4,835,409 -2.5 79.5 12.6
2010 4,851,328 0.3 70.7 -8.8
2011 4,849,480 (4) 72.9 2.2
2012 4,695,782 -3.2 76.8 3.9
2013 4,868,847 3.7 72.7 -4.0

(1) After reinsurance transactions, excludes state funds.
(2) After dividends to policyholders. A drop in the combined ratio represents an improvement; an increase represents a deterioration.
(3) Calculated from unrounded data.
(4) Less than 0.1 percent.

Source: SNL Financial LC.

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TOP TEN SURETY GROUPS/COMPANIES BY DIRECT PREMIUMS WRITTEN, 2011 (1)

($000)

Rank Group/company Direct premiums written Market share
1 Travelers Companies Inc.  $830,034 16.1%
2 Liberty Mutual  764,119 14.8
3 Zurich Insurance Group Ltd.  496,617 9.6
4 CNA Financial Corp.  401,659 7.8
5 Chubb Corp.  243,043 4.7
6 HCC Insurance Holdings Inc.  170,744 3.3
7 Hartford Financial Services  163,752 3.2
8 International Fidelity Insurance Co.  158,099 3.1
9 ACE Ltd.  124,009 2.4
10 RLI Corp.  110,769 2.2

(1) Before reinsurance transactions. Includes U.S. states and territories.

Source: SNL Financial LC.

 

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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 had the highest rating. The insurer’s high rating attached 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. The combined ratio climbed to 421.4 in 2008 at the height of the economic downturn. In 2013 the combined ratio fell below zero as several companies reduced loss reserves by more than $2 billion combined as a result of strains created by the financial crisis. 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.

 

FINANCIAL GUARANTY INSURANCE, 2004-2013 (1)

($000)

Year Net premiums written (2) Annual percent change Combined ratio (3) Annual point change (4)
2004 $2,133,599 -14.9% 44.3 14.9 pts.
2005 2,014,467 -5.6 29.8 -14.5
2006 2,163,324 7.4 47.7 17.8
2007 3,038,889 40.5 152.4 104.8
2008 3,171,560 4.4 421.4 268.9
2009 1,793,410 -43.5 100.6 -320.7
2010 1,371,908 -23.5 228.4 127.8
2011 968,898 -29.4 219.0 -9.4
2012 692,541 -28.5 181.6 -37.4
2013 710,480 2.6 -3.4 -184.9

(1) Based on insurance expense exhibit (IEE) data. Ambac did not file an IEE from 2004 to 2006; Financial Guaranty Insurance Co. did not file an IEE in 2012. Several companies in 2013 reduced loss reserves as a result of strains from the financial crisis, creating a negative combined ratio.
(2) After reinsurance transactions, excludes state funds.
(3) After dividends to policyholders. A drop in the combined ratio represents an improvement; an increase represents a deterioration.
(4) Calculated from unrounded data.

Source: SNL Financial LC.

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TOP TEN WRITERS OF FINANCIAL GUARANTY INSURANCE BY DIRECT PREMIUMS WRITTEN, 2013

($000)

Rank Group/company Direct premiums written (1) Market share (2)
1 Assured Guaranty Ltd. $305,915 45.3%
2 MBIA Inc. 143,989 21.3
3 Ambac Financial Group Inc. 95,536 14.2
4 Financial Guaranty Insurance Co. 37,969 5.6
5 Syncora Holdings Ltd. 33,873 5.0
6 Radian Group Inc. 18,086 2.7
7 CIFG Assurance North America Inc. 15,604 2.3
8 Build America Mutual Assurance Co. 13,560 2.0
9 Berkshire Hathaway Inc. 7,033 1.0
10 Stonebridge Casualty Insurance Co. 3,000 0.4

(1) Before reinsurance transactions.
(2) Based on U.S. total, includes territories.

Source: SNL Financial LC.

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CREDIT INSURANCE FOR CUSTOMER DEFAULTS

Credit insurance protects exporters 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. The combined ratio topped 100 from 2007 to 2010 but fell to 94.3 in 2011 as economic conditions improved.

 

CREDIT INSURANCE, 2004-2013

($000)

Year Net premiums written (1) Annual percent change Combined ratio (2) Annual point change (3)
2004 $806,381 25.9% 96.9 4.5 pts.
2005 936,108 16.1 81.1 -15.8
2006 1,090,145 16.5 86.0 4.9
2007 1,405,444 28.9 129.3 43.4
2008 1,413,313 0.6 171.0 41.6
2009 1,224,474 -13.4 140.8 -30.2
2010 1,344,766 9.8 127.2 -13.6
2011 1,490,135 10.8 94.5 -32.7
2012 1,457,796 -2.2 91.3 -3.2
2013 1,167,315 -19.9 74.9 -16.4

(1) After reinsurance transactions, excludes state funds.
(2) After dividends to policyholders. A drop in the combined ratio represents an improvement; an increase represents a deterioration.
(3) Calculated from unrounded data.

Source: SNL Financial LC.

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TOP TEN CREDIT INSURANCE GROUPS/COMPANIES BY DIRECT PREMIUMS WRITTEN, 2011 (1)

($000)

Rank Group/company Direct premiums written Market share
1 American Financial Group Inc.  $334,725 14.2%
2 QBE Insurance Group Ltd.
305,864 13.0
3 Assurant Inc.  285,262 12.1
4 Allianz SE  237,980 10.1
5 American National Insurance  159,498 6.8
6 American International Group  140,624 6.0
7 Old Republic International Corp.  130,658 5.6
8 Coface North America Insurance Co. 91,993 3.9
9 Arch Capital Group Ltd.  83,021 3.5
10 Allstate Corp.  76,770 3.3

(1) Before reinsurance transactions.  Includes U.S. states and territories.

Source: SNL Financial LC.

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