In the first half of this year MGIC Investment Corp. has upped its participation in the private mortgage insurance business' most competitively priced product, single-premium lender-paid mortgage insurance.
In the second quarter, single-premium LPMI was 17% of new insurance written; it was 20% of the first-quarter NIW at the Milwaukee-based company. For all of 2014, single-premium LPMI was 11% of NIW and in 2013 just 4%.
But to gain that volume, MGIC offered lenders an average discount of 11% on the premium listed on its rate card, "reflecting the competitive environment," said CEO Pat Sinks during the company's conference call.
This represents a philosophical switch for MGIC, which at one point was reluctant to do discounts on lender-paid premium products, feeling the revenue was not worth the risk.
However, MGIC has pursued this new strategy cautiously, and the company would still prefer to charge full price for both borrower-paid and lender-paid MI.
"We've always been reluctant and fight against people discounting price," Mike Zimmerman, MGIC senior vice president of investor relations, said in a July 17 interview following the earnings call. "We do it strategically at a customer level so that on a blended basis, the combination of [borrower-paid and lender-paid] business that we're getting from that customer allows us to achieve those returns that we think are needed to maintain this business."
"We're willing to do this today because the mix of business that we can get, even with these discounts still gets us to the return level that we find acceptable for the risk profile," he continued. "However we would like to see the practice of discounting discontinued and we can't stop it on our own. So we have to bow to our customers."
Single-premium products of all kinds, including borrower-paid mortgage insurance, was 20% of NIW at MGIC in the second quarter.
The company's normal BPMI to LPMI ratio is 90/10, said company spokeswoman Katie Monfre. "A combination of competitive behaviors, customer preferences and a strong refi market has shifted that mix to include a slightly higher percentage of LPMI," she said.
MGIC has the lowest share of single-premium NIW among the private MIs and does not expect that will change after its competition reports their results for the quarter, Monfre said.
The decline in LPMI share between the first and second quarters was that MGIC got less business in that product from one lender, added Larry Pierzchalski, executive vice president of risk management, during the conference call.
Separately, Sinks said during the call that a trio of actions should put MGIC in compliance with the capital requirements created by Fannie Mae and Freddie Mac to continue doing business with the agencies. Back in April, MGIC had a $230 million shortfall.
But during the quarter, the holding company transferred $45 million in assets to Mortgage Guaranty Insurance Corp., its primary subsidiary, from other units. There was also a $60 million decrease in required assets because loans were removed from the delinquent inventory as the Countrywide/Bank of America settlement was put into effect.
Finally, MGIC has been in discussions with the GSEs about restructuring reinsurance transaction and the effect it had on the amount of required assets needed to be held. Once it is approved by the GSEs and MGIC's primary regulator in Wisconsin, MGIC's required assets would be further reduced by almost $600 million. At that point, MGIC will be able to certify it is in compliance with the capital standards, Sinks said.
For the quarter, MGIC earned $113.7 million, compared with net income of $45.5 million in the second quarter of 2014. NIW increased 42%, to $11.8 billion from $8.3 billion one year ago.
Even though this year's NIW is expected to exceed 2014's, MGIC warned in its press release that it expects the year-over-year growth in the second half of the year to be less than it was during the first half of 2015.
Its total risk-to-capital ratio improved to 14.8-to-1 from 15.4-to-1 at the end of the first quarter. There are 17 states that require private mortgage insurers to have a 25-to-1 risk-to-capital ratio. This state regulatory standard is not related to the secondary market capital requirements which will become effective at the end of the year.