Best’s News & Research Service - September 15, 2023 02:10 PM (EDT)
AM Best Revises Outlooks to Positive for Operating Subsidiaries of MGIC Investment Corporation
- September 15, 2023 02:10 PM (EDT)
Oldwick //BestWire// - AM Best has revised the outlooks to positive from stable and affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Ratings of “a-” (Excellent) of the operating subsidiaries of MGIC Investment Corporation. The operating subsidiaries are Mortgage Guaranty Insurance Corporation, MGIC Indemnity Corporation, and MGIC Assurance Corporation (collectively referred to as MGIC). All companies are domiciled in Milwaukee, WI.
The Credit Ratings (ratings) reflect MGIC’s balance sheet strength, which AM Best assesses as strongest, as well as its adequate operating performance, limited business profile and appropriate enterprise risk management (ERM).
The positive outlooks reflect the diminishing significance of the legacy book of mortgage insurance on loans originated in 2008 and prior, and the expectation that the company will sustain the positive trend in earnings growth, while maintaining its overall balance sheet strength assessment. The potential for the legacy book to hinder operating performance materially is reduced because the risk in force of the legacy book has declined significantly. Furthermore, the mark-to-market loan-to-value ratios for the legacy book have declined as the legacy book has benefited from home price appreciation since the loans were originated, especially in the past few years.
The legacy book was originated at a time when underwriting standards were much looser than they have been in the years following the great financial crisis (GFC). During the GFC, loans from this cohort led to significant losses for the private mortgage insurance industry, but since that time, the credit profile of MGIC’s book of business has been improved as underwriting standards tightened.
A potential future upgrade of the operating performance assessment is contingent upon a continuation of operating results that match or exceed the current level while maintaining or improving MGIC’s current balance sheet metrics.
MGIC’s balance sheet strength assessment of strongest is supported by its risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), which is at the strongest level on base and stress scenarios. The assessment of strongest is supported further by MGIC’s use of reinsurance, compliance with private mortgage insurer eligibility requirements, strong liquidity position and conservative investment portfolio, as well as demonstrated financial flexibility.
AM Best assesses MGIC’s operating performance as adequate. The company experienced significant favorable reserve development in 2022, leading to further reduction in the calendar-year loss ratio. The company’s 2022 loss ratio and combined ratio are in line with, and sometimes better than, that of its peers. The delinquency rate also continued to decrease in 2022. MGIC’s expense ratio slowly and steadily increased over the past few years primarily due to investments in technology to enhance its data and analytic capabilities, as well as the ability to work with a broad range of customers.
AM Best assesses MGIC’s business profile as limited because the company is a monoline (re)insurer. Furthermore, it faces stiff competition from other private mortgage insurers and governmental agencies (e.g., Federal Housing Administration and Veterans Affairs) providing mortgage insurance. In addition, MGIC’s business profile is subject to a high degree of product risk because the performance of the mortgage insurance industry is linked highly to the macroeconomic environment and the standards set by the government-sponsored enterprises: Fannie Mae and Freddie Mac. However, this risk is mitigated somewhat by the various reinsurance programs that MGIC utilizes.
AM Best assesses MGIC’s overall ERM as 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.
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Guide to Best’s Credit Ratings. For information on the proper use of Best’s Credit Ratings, Best’s Performance Assessments, Best’s Preliminary Credit Assessments and AM Best press releases, please view Guide to Proper Use of Best’s Ratings & Assessments.
AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City.