Arch Capital Group last Friday acquired CMG MortgageInsurance Co. from PMI Mortgage Insurance Co., a move that Moody'sInvestors Service sees as positive for Arch but credit-negative forexisting players in the mortgage-insurance market that may have tocontend with well-capitalized new entrants going forward.

CMG, says Moody's is a legacy mortgage-insurance company thathas been in rehabilitation under the receivership of the ArizonaDepartment of Insurance since 2011. The ratings agency says theacquisition is “credit-positive for Arch because mortgage insurancewill diversify its business, and current market conditions areattractive for well-capitalized mortgage insurers not encumbered bylegacy exposures.”

Moody's adds, “Under the terms of the agreement, Arch willacquire CMG and PMI's mortgage insurance operating platform,significantly limiting the operational risk inherent in entering anew market, and will reinsure non-delinquent loans insured by PMIbetween 2009-2011.” The acquisition will also give Arch access toCMG's relationship with CUNA Mutual Group, and relationships with anumber of credit unions that tend to originate higher-quality primeloans, says Moody's.

The ratings agency says Arch will be exposed to some of CMG andPMI legacy risks, but notes that CMG's insured portfolio hasperformed well relative to peers, and the PMI loans were originatedafter the financial crisis under tighter underwritingstandards.

“The mortgage industry is likely past the trough of the cycleand benefits from tighter underwriting standards and an improvinghousing market,” says Moody's.

For existing mortgage insurers, such as Radian Guaranty, Inc.,MGIC and Genworth Mortgage Insurance Corp., Moody's says Arch'sentrance into the market could pose some problems. “While there arepositive developments in the industry, including increasing privatemortgage insurance penetration, and generally favorable lossexperience on recent vintage business, existing insurers, to theextent they are unable to raise or generate additional capital inthe next few years, will feel more pressure as new,well-capitalized competitors, unencumbered by legacy exposures,enter the market,” Moody's says.