Moody's: Arch's Acquisition of Mortgage Insurer Could Pose Problems for Existing Market Players

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

CMG, says Moody's is a legacy mortgage-insurance company that has been in rehabilitation under the receivership of the Arizona Department of Insurance since 2011. The ratings agency says the acquisition is “credit-positive for Arch because mortgage insurance will diversify its business, and current market conditions are attractive for well-capitalized mortgage insurers not encumbered by legacy exposures.”

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

The ratings agency says Arch will be exposed to some of CMG and PMI legacy risks, but notes that CMG's insured portfolio has performed well relative to peers, and the PMI loans were originated after the financial crisis under tighter underwriting standards. 

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

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