In 2014 we estimated that PMIERs were implemented as drafted, that is without consideration for the balance changes MGIC and others recommended, MGIC would have shortfall in required assets of approximately $300 million by the end of 2016. That is despite MGIC’s current risk to capital ratio of 14.6 to 1 and its return to annual profitability.
However we believe that a combination of internal resources additional or changes to existing reinsurance contracts and if needed, non-dilutive capital enabled would enable MGIC to mitigate this estimated shortfall and comply fully with the PMIERs requirements. We have been in discussions with the existing panel of reinsurers and feel confident that we’ll have a solution that will eliminate any meaningful capital haircut from the GSEs. Depending on the final form of the PMIERs, re-insurance and internal resources may be the way to overcome any PMIER shortfall.
Importantly even if there is no modification to the proposed PMIERs, after considering re-insurance benefits we still will be able to maintain mid-teens returns based on the mix of business we expect to write in 2015, given the underwriting quality and pricing terms being offered.
Further we would hope that post PMIERs that GSEs would lower the loan level price adjustments in G fees they charge and begin to seriously consider transferring more risk to the MIs, either in the form of deeper coverage on the above 80% LTVs, or seeking insurance on loans below 80% LTV as our concerns of counterparty risk will have been abated, all of which our company and our industry would benefit from.
The review and updating of state capital standards by the NAIC, which the Wisconsin Insurance Regulator is leading continues to move forward, although we are not aware of a timeframe for implementation. We do not expect the revised state capital standards to be more restrictive than the financial requirements of the draft PMIERs. The debate over housing policy and market structure was brought front and center once again with the recent FHA premium price cuts and the GSE’s announcement of 97% LTV loans and the awaited policy direction of G fees and loan level price adjustments by the FHFA.
At the same time the President announced the FHA premium reduction he also renewed his call for GSE reform in the past, I have said that Congress would not act on any legislation for a number of years. It is possible with the change of parties and control of Congress that there is more legislative activity than we initially thought, but I continue to believe that the current market framework is what we will be operating in for a considerable period of time, as Washington moves at a glacial pace.
In closing, during the quarter we continue to make great progress on the path towards sustained profitability with annual earnings of $252 million. During the year we [inaudible] $33 billion of high quality business the in-force portfolio grew by 4%, the level of delinquencies and claim payments continue to fall, MGIC’s risk-to-capital ratio improved to 14.6 to 1, our industry market share improved nicely and MGIC’s share within our industry is strong and we maintained our traditional low expense ratio.
