A rapid escalation in mortgage defaults and foreclosures led to extremely high losses and negative operating returns last year by mortgage guaranty insurers, said rating firm A.M. Best Co.

The Oldwick, N.J.-based firm said the "tremendous" negative impact of those events resulted in a 2007 industrywide combined ratio of 141.3, as compared with the five-year average of 87.7 and the ten-year average of 75.4.

This was a sharp contrast to the record years of profitability earlier in the decade, during which most mortgage insurance companies added to their capital base, enabling them to better withstand the subsequent downturn in the housing market cycle, said Best.

The rating firm noted that the accelerating defaults and subsequent foreclosures--started primarily in the subprime mortgage segment in the second half of 2006--were the immediate causes for the 2007 downturn in the industry's operating performance.

Best also cited as negative impact statistics:

o The loss and loss adjustment expense (LAE) ratio was 116.1 in 2007, compared with 47.6 in 2006 and the five-year average of 62.9.

o Investment income could not offset the shortfall in underwriting losses in 2007, shown by an operating ratio of 120.4, compared with the five-year average operating ratio of 64.9.

o The industry's capital position deteriorated in 2007 driven by significant operating losses incurred with a negative total return on equity of nearly 28 percent posted for the year. The increase in the net underwriting leverage ratio, from 2.9 in 2006 to 4.1 in 2007, was a key signal.

Best's data was contained in its "Special Report: Credit, Housing Market Woes Slam Mortgage Insurance Industry."

Special Reports /

Best Reports On Mortgage Insurers' Negative Returns

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