OLDWICK: AM Best has affirmed the financial strength rating of A- (Excellent) and the Long-Term Issuer Credit Ratings of “a-” of certain operating subsidiaries of MGIC Investment Corporation, which are Mortgage Guaranty Insurance Corporation, MGIC Indemnity Corporation, MGIC Assurance Corporation and MGIC Reinsurance Corporation of Wisconsin.
The outlook of these Credit Ratings is stable. The ratings reflect MGIC’s balance sheet strength, which AM Best categorizes as strongest, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM).
MGIC’s risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), is at the strongest level on a stressed and unstressed basis. Shareholders’ equity at MGIC has increased in the past five years, and AM Best expects further increases in the near term.
The company’s strong liquidity position, conservative investment portfolio and financial flexibility, continued transfer of mortgage exposures to the capital market through the use of mortgage insurance-linked securities, as well as its compliance with Private Mortgage Insurer Eligibility Requirements (PMIERs 2.0) support the balance sheet assessment of strongest.
MGIC’s operating performance is assessed as adequate based on positive underwriting results reflected in the loss and combined ratios of its mortgage insurance business during the past few years.
MGIC’s historical loss and combined ratios, which spiked significantly in 2008-2012, have declined meaningfully over the past six years, reflecting improvements in the housing market, disciplined underwriting and favorable loss development from prior years. MGIC’s expense ratio remains one of the lowest in the mortgage insurance industry.
MGIC’s overall operating performance over the past five years has been fueled by favorable macroeconomic conditions that greatly impact the quality of mortgage originations and the credit profile of borrowers.
MGIC’s business profile is assessed as limited, as the company is a monoline (re)insurer. Furthermore, it faces stiff competition not only from other private mortgage insurers and governmental agencies (Federal Housing Administration and Veterans Affairs) providing mortgage insurance, but also from products that reduce the demand for private mortgage insurance effectively.
In addition, product risk is considered high because the performance of the mortgage insurance industry is linked to the macroeconomic environment and the policies of the government-sponsored enterprises (Fannie Mae and Freddie Mac).
MGIC’s overall ERM assessment is appropriate, as the company employs a robust ERM framework and infrastructure that is embedded across the company. MGIC’s ERM framework is commensurate with the size, nature and complexity of its mortgage insurance business. AM Best considers MGIC’s risk assessment capabilities to be aligned appropriately with its risk profile.
Edited by Kazim Rizvi