Magazine article American Banker

MGIC Freeing Itself from Money-Losing Captive Arrangements

Magazine article American Banker

MGIC Freeing Itself from Money-Losing Captive Arrangements

Article excerpt

In a stunning departure from recent industry practice, MGIC Investment Corp. said Thursday that it is willing to sacrifice market share by refusing to participate in unprofitable captive reinsurance schemes.

Executives of the Milwaukee company, the largest mortgage insurer, said in its quarterly earnings call that beginning in April it will not make captive deals with lenders unless it can retain at least 75% of the premiums it collects.

"Not that we like to lose market share, but at the levels of return on this business, it is not a business that is appropriate for our company to write," president and chief executive officer Curt S. Culver said.

The son of a restaurateur, he offered, "If you keep selling hamburgers (for) less than they cost how long are you going to stay in business?"

In captive reinsurance arrangements, lenders assume part of the default risk on a mortgage in return for some of the premium. Traditionally, the entire premium has gone to a mortgage insurer.

Mr. Culver said the practice has become so widespread that lenders are pushing mortgage insurers to cede as much as 40% of their premiums -- a proposition his company can no longer live with, he said.

When MGIC hands over that much, Mr. Culver said, "frankly, the returns are unacceptable," since losses can eat up 40% of the premium and expenses consume 20%, leaving nothing over for the insurer.

The CEO said that in the past week he has talked with all but one of his 11 top lender clients on the scheduled change in policy (MGIC first disclosed the change in an Oct. …

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