AM Best Affirms Credit Ratings of MGIC Investment Corporation’s Operating Subsidiaries
OLDWICK, N.J.–(BUSINESS WIRE)–AM Best has affirmed the Financial Strength Rating of A- (Excellent) and the Long-Term Issuer Credit Ratings of “a-” of operating subsidiaries of MGIC Investment Corporation. The operating subsidiaries are Mortgage Guaranty Insurance Corporation, MGIC Indemnity Corporation, MGIC Assurance Corporation and MGIC Reinsurance Corporation of Wisconsin (collectively referred to as MGIC). The outlook of the Credit Ratings (ratings) is stable. All companies are domiciled in Milwaukee, WI.
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 in base and various COVID-19 stress scenarios. The base scenario is analyzed based on the company’s financial statements as of June 30, 2020, which already included some of the impact from the COVID-19 pandemic. The COVID-19 stress scenarios include increases in COVID-19-related losses, and other stress test components in the baseline stress test outlined in “Stress Testing Rated Companies for COVID-19,” published by AM Best on May 18, 2020. The application of the COVID-19 stresses on MGIC’s book of business broadly follows the guidelines in AM Best’s criteria procedure, “Catastrophe Analysis in AM Best Ratings.” The most impactful stresses relate to the assumed claim rates, which range from 4-6% of MGIC’s current primary risk-in-force, which was $58.7 billion as of June 30, 2020. In these stress tests, AM Best assumed that MGIC realizes losses over a two-year period, while booking premiums in that timeframe, and that surplus is reduced by tax-affected losses after reinsurance. After applying the various stresses to MGIC’s book of business, the company’s risk-adjusted capitalization, as determined by BCAR, remained at the strongest level.
The company’s compliance with Private Mortgage Insurer Eligibility Requirements (PMIERs 2.0), utilization of traditional reinsurance and mortgage insurance-linked securities to reduce its earnings and capital volatility against unfavorable housing environment, strong liquidity position and conservative investment portfolio, as well as the financial flexibility to raise capital during the COVID-19 pandemic support the balance sheet assessment of strongest.
MGIC’s operating performance is assessed as adequate despite the COVID-19 pandemic. The company’s loss ratio, combined ratio and percentage of loans in default increased in the first half of 2020 from 2019. However, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), forbearance programs and foreclosure moratorium have helped to mitigate the negative impact of the COVID-19 pandemic on MGIC. MGIC’s average loss, expense and combined ratios for the past five and a half years, from 2015 to June 2020, showed underwriting profitability. MGIC’s historical loss and combined ratios, which spiked significantly during the financial crisis, had declined meaningfully over the past several years until the COVID-19 pandemic became apparent in the second quarter of 2020. MGIC’s expense ratio remains one of the lowest in the mortgage insurance industry. The company’s credit profile has been improving over the past several years, mainly driven by its improved underwriting standards as well as the effect of the risk-based capital charges established by the PMIERs 2.0.
MGIC’s business profile is assessed as limited, as the company is a monoline (re)insurer. Furthermore, it faces stiff competition from other private mortgage insurers and governmental agencies (i.e., Federal Housing Administration and Veterans Affairs) providing mortgage insurance. In addition, product risk is considered high because the performance of the mortgage insurance industry is linked to the macroeconomic environment and the standards set by the government-sponsored enterprises (i.e., 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.
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 media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media – Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.
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