Arch U.S. MI's acquisition of United Guaranty Corp. will make one of the smallest private mortgage insurers the sector's new market leader. While the move is likely to ease pricing competition among the six remaining players, it's not expected to set off a wave of further consolidation.

"I think if you have fewer competitors there is less pressure on pricing," said Fitch Ratings analyst Donald Thorpe. That being said, a company could still decide to cut price to get market share.

Arch was considered to be one of the more aggressive underwriters in terms of pricing, especially after it adopted a data analytics pricing methodology similar to United Guaranty. While the other PMI firms still use traditional matrices of credit scores and loan-to-value ratios to model rates, price competition has evened out as all of the companies have adjusted their methodologies.

Still, Arch and United Guaranty see their respective pricing methodologies as a competitive differentiator that helps them more accurately model the long-tail MI business.

"We both focus on and culturally are aligned to appropriately price risk using all the tools in the tool kit including in-depth analytics," Arch Capital Group CEO Dinos Iordanou said during a conference call.

On the marketing side and customer satisfaction side, UG was better than Arch and it will incorporate that into its future operations, Iordanou added.

It is unlikely there will be any other consolidation in the MI space because this deal is the only apparent transaction in this very limited market.

"This is kind of the obvious one. Of the remaining players there aren't any obvious candidates to us," said Bose George, an analyst with Keefe, Bruyette & Woods.

"This transaction made a lot of sense because one of the companies has a much smaller [market] share, so the amount of cannibalization is limited," George said, adding that an Arch/UG combination could lose as much as five percentage points from a pro forma 27.4% second-quarter NIW share for the merged entities.

If two of the larger players ended up combining, "you could end up losing quite a lot of business," he said.

The lenders who use both Arch and UG are likely to shift a portion of their business around to other underwriters.

However, given Arch's start as CMG Mortgage Insurance, whose previous ownership had used it specifically to write policies for credit unions, the loss in market share may not be as great, said Stanislas Rouyer, an analyst with Moody's Investors Service.

This particular transaction "should result in greater client retention than a hypothetical merger of two large mortgage insurers," Rouyer said. "Client retention is a meaningful consideration in mergers, reducing the attractiveness of combination between two established players."

Consolidation is a hot topic in the industry. Assuming a mortgage originations market of $1.5 trillion a year, the share that would use private mortgage insurance is approximately $200 billion in originations and that was not enough to support seven underwriters, MGIC Investment Corp. CEO Patrick Sinks said at a KBW conference in June.

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