2003 CAS Annual Meeting Private Mortgage Insurance Industry Update

1. 2003 CAS Annual MeetingPrivate Mortgage Insurance Industry Update Presented by: Kyle Mrotek, A.C.A.S., M.A.A.A. New Orleans, LA November 12, 2003 May 22, 2001

2. Private Mortgage Insurance (PMI) Industry Update • Activities • Reinsurance, Bulk Transactions, GSE’s • Regulatory • Taxes, RESPA Reform, GSE Reform Milliman USA

3. PMI Industry UpdateActivities Reinsurance • Catastrophe protection • Captive reinsurance • Banks and mortgage lenders establish captive reinsurance companies • Captive reinsurers assume mortgage insurance risk on loans originated by lender and affiliates Milliman USA

4. PMI Industry UpdateActivities Reinsurance (cont.) • Captive reinsurance (cont.) • Captive mortgage reinsurance is only about 10 years old • Captives typically monoline like primary companies • Isolated trust for each cedant • Much growth, both in captive counts and premium ceded Milliman USA

5. PMI Industry UpdateActivities Reinsurance (cont.) Milliman USA

6. PMI Industry UpdateActivities Reinsurance (cont.) Source: Schedule F Milliman USA

7. PMI Industry UpdateActivities Reinsurance (cont.) Milliman USA

8. PMI Industry UpdateActivities Reinsurance (cont.) • Captive reinsurance (cont.) • Typically aggregate excess of loss contracts • Example: Reinsurer assumes layer 5% excess 5% of coverage for 25% of written premium • Quota share contracts exist too, but less frequent Milliman USA

9. PMI Industry UpdateActivities Reinsurance (cont.) • Captive reinsurance (cont.) • Cede trends • Began relatively small (e.g., layers of coverage for 15%-16% of written premium) • Trended to deeper cedes (e.g., layers of coverage for 35%-40% of written premium) Milliman USA

10. PMI Industry UpdateActivities Reinsurance (cont.) • Captive reinsurance (cont.) • Cede trends (cont.) • More recently, industry leaders announce intent to reduce cede %’s • Reasons cited • Risk/reward balance, and • Profitability objectives Milliman USA

11. PMI Industry UpdateActivities Bulk Transactions • Loan-level coverage written on pools of loans, often for securitization market • Reporting of bulk transactions beginning 3rd quarter 2001, so little history available. • Large portion of involvement based on subprime loans (source: Inside Mortgage Finance) • Analysts keeping close eye on bulk losses Milliman USA

12. PMI Industry UpdateActivities Bulk Transactions (cont.) • Bulk business as percent of MI industry’s new insurance written • 12% for 2nd half, 2001 • 16% for 2002 • MGIC, UGC, Radian and PMI bulk primary MI market leaders • Bulk primary MI in 2002 • MGIC represents 25% • UGC represents 19% Source: Inside Mortgage Finance Milliman USA

13. PMI Industry UpdateActivities Government Sponsored Enterprises (GSE’s) • Fannie Mae (formerly known as Federal National Mortgage Association) • Freddie Mac (formerly known as Federal Home Loan Mortgage Corporation ) Milliman USA

14. PMI Industry UpdateActivities GSE’s (cont.) • Fannie Mae and Freddie Mac • Quasi-governmental agencies • Publicly owned corporations • Represent roughly half of secondary mortgage market • Compete against each other, as well as other entities • Enjoy implied governmental backing, so lower borrowing rates Source: Residential Mortgage Lending Milliman USA

15. PMI Industry UpdateActivities GSE’s (cont.) • GSE Regulation • Office of Federal Housing Enterprise Oversight (OFHEO) regulates Fannie Mae and Freddie Mac • OFHEO established by Department of Housing and Urban Development (HUD) in 1992 Source: OFHEO website Milliman USA

16. PMI Industry UpdateActivities GSE’s (cont.) • OFHEO’s mission - ensure the capital adequacy and financial safety and soundness of Fannie Mae and Freddie Mac • Funded through assessments to Fannie Mae and Freddie Mac, so not funded by taxpayers Source: OFHEO website Milliman USA

17. PMI Industry UpdateRegulatory Taxes • Tax deductibility of PMI • Mortgage insurance premiums proposed to be tax-deductible from federal income taxes • Deduction to apply to homeowners whose adjusted gross income is $100,000 or less • Argument is MI premium should be tax deductible because lenders, not homeowners, benefit from MI Source: Inside Mortgage Finance Milliman USA

18. PMI Industry UpdateRegulatory Taxes (cont.) • Tax deductibility of PMI (cont.) • Expected to allow “some 300,000 families, who now rent, to qualify for a mortgage” (American Homeowners Association) • Predicted tax savings up to $700 on $135,000 loan (Milwaukee Journal Sentinel) • MI industry in favor to “help level the playing field for private mortgage insurers against 80-10-10 loans” (Inside Mortgage Finance) Milliman USA

19. PMI Industry UpdateRegulatory Taxes (cont.) • Tax deductibility of PMI (cont.) • Bi-partisan provision introduced March 2003, but cut by President Bush in final version of tax bill in June 2003 Milliman USA

20. PMI Industry UpdateRegulatory RESPA Reform • RESPA – Real Estate Settlement Procedures Act (current version since 1992) • Purpose: To inform borrowers of the costs associated with their loan and loan closing • Requires lender to provide borrower with good faith estimate of the settlement costs • Prohibits kickbacks and unearned fees • Reason for some disclosure documents received during loan closing process Source: Residential Mortgage Lending Milliman USA

21. PMI Industry UpdateRegulatory RESPA Reform (cont.) • RESPA reform proposed • Provides safe haven from anti-kickback and unearned fees provision for Guaranteed Mortgage Packages (GMP) • Packaging could save consumers in closing costs • Imposes tolerance levels in good-faith estimates • Stipulates lender-paid mortgage broker compensation as credit to borrower Source: Mortgage Banking, February 2003 Milliman USA

22. PMI Industry UpdateRegulatory GSE Reform • Treasury and HUD want Treasury to assume from HUD regulatory role of GSE’s • HUD interested in maintaining authority of establishing affordable housing goals Milliman USA

23. PMI Industry UpdateRegulatory GSE Reform (cont.) • OFHEO too small to effectively oversee actions of GSE’s • Freddie Mac underreported earnings by $4.5 billion over 3 years • Fannie Mae committed “computational error” of over $1 billion • GSE’s have looser disclosure standards than other publicly traded firms Milliman USA

24. PMI Industry UpdateRegulatory GSE Reform (cont.) • Parties for reform (i.e., lenders, banks) • Lower borrowing costs (implied government backing) • GSE’s enjoy too many benefits not permitted to competitors (Over $2 billion emergency crisis line of credit) • Operating leverage too high, could compromise economy if default (less stringent risk-based capital standards) Milliman USA

25. PMI Industry UpdateRegulatory GSE Reform (cont.) • Parties against reform (i.e., GSE’s) • Provide savings to consumer in borrowing costs (according to Congressional Budget Office, 25 basis points) • Provide liquidity for securitization market • Finalization of reform not expected before year-end Milliman USA

26. PMI Industry UpdateClosing Remarks • Large political involvement • Industry constantly evolving Milliman USA

27. Private Mortgage Insurance Q&A Milliman USA