Fitch Sees Challenges Growing for Mortgage Insurance Business.

Fitch Ratings here has dropped its outlook on the entire private mortgage insurance industry from "Stable" down to "Negative."

The rating agency is pessimistic about what it terms "systemic concerns that are challenging the industry's core fundamentals," said analysts Brett Lawless, Michael J. Barry and Frank A. Meyers.

"These include the continuation of severe competition from within and outside the industry, resulting in the proliferation of various risk-sharing arrangements; the industry's increasing involvement in the subprime market, primarily through the bulk channel; and likely adverse selection related to increased levels of 'piggyback' loans, which may increase insurers' natural default rate on prime business," the report said.

While there should be little impact on future earnings and capital formation over the near terms, these trends, the agency continued, could result in a deterioration of the industry's long-term credit fundamentals.

Fitch also expressed concern about whether several of the private mortgage insurers management teams would "re- evaluate the cost/benefit relationship" of maintaining at least an "AA" financial strength rating.

Among the issues addressed in the report is Milwaukee-based Mortgage Guaranty Insurance Corp.'s decision not to do captive reinsurance arrangements where the ceded premium is above 25%.

"Since MGIC's announcement, none of its competitors have publicly announced their intention to institute similar restrictions. Many, if not all, competitors appear to be viewing MGIC's move as an opportunity to increase market share (or avoid a loss of market share if other insurers do not also follow suit) among the coveted large lenders. Due to the strong demand for high-premium cede captives among large lenders, which account for the majority of captive activity, the market share impact stemming from an insurers' decision to limit cession rates to 25% could be meaningful," Fitch said.