Standard & Poor's also said that it affirmed its ratings on these companies, including its 'A+' counterparty credit rating on Investment and its 'AA+' counterparty credit and financial strength ratings on MGIC.
These rating actions stemmed from Standard & Poor's annual review of all U.S. domestic residential MIs.
MGIC is the largest and historically most profitable MI in the U.S. The two other rated insurers in the group are very small, exist for special purposes, and have capital in excess of that required to pay losses in any realistic severe loss scenario. For more than the past 10 years, MGIC has posted results that have been extremely strong and at or near the top of its eight-member peer group based on such measures as ROR, average assets, average equity, and combined ratio. Expense control has been a particular strength.
In 1999, in response to the declining pricing adequacy affecting all companies in the traditional -- and still predominant -- account executive-mediated flow market, MGIC began underwriting risk in bulk insurance. Business in the bulk market, which accounted for about 18.2% of MGIC's insured loans in force at the end of 2002 (the largest percentage of any MI), is obtained mainly by direct price competition, and a significant portion of it is of sub-prime and 'A-' quality. Gross pricing in the bulk market is improving and is much higher than in the flow market, where premium is virtually uniform among all insurers. In addition, acquisition costs for insurance obtained in bulk are much lower than for flow risk, and bulk insurance has so far not been subject to lender initiatives like captive reinsurance and GSE pool insurance, which have eroded industry terms of trade. However, losses in the bulk market have been far higher than those resulting from flow underwriting. In Investment's March 31, 2003, 10-Q report, delinquencies in the bulk portfolio of its MI subsidiaries were more than three times those in its flow portfolio, and delinquencies in its sub-prime and 'A-' portfolio were almost four times those in its flow portfolio.
In 2002, MGIC reported very strong earnings that included good contributions from both flow and bulk business. However, results were slightly behind those booked in 2001, and the difference between the second halves of each year was wider. Profitability continued to decline moderately in the first quarter of 2003, though to levels that are still very strong. Because of the higher losses incurred and loss ratios in both the flow and bulk markets, MGIC's profitability measures, as a whole, have moved toward the middle of the peer group. The loss ratio (the second highest in the industry in 2002 and the highest in 2003's first quarter) has been affected by increasing loss reserve levels, which management expects to continue for the balance of 2003.
MGIC remains a very strong insurer with an excellent market position, deep and experienced management, a solid U.S. orientation, and wide dispersion of risk, both geographically and by lender. It continues to have extremely strong 'AAA' capitalization based on Standard & Poor's risk-based capital adequacy model for U.S. residential MIs. Investment has histo