Reinsurance

3 Months Ended

Mar. 31, 2022

Reinsurance Disclosures [Abstract]

Reinsurance

Reinsurance

The reinsurance agreements to which we are a party, are discussed below. The effect of all of our reinsurance agreements on premiums earned and losses incurred is shown in table 4.1 below.

Reinsurance
Table	4.1
		Three Months Ended March 31,
(In thousands)		2022		2021
Premiums earned:
Direct		$	287,273	$	296,271
Assumed		2,126		2,411
Ceded (1)		(34,159)		(43,637)
Net premiums earned		$	255,240	$	255,045
Losses incurred:
Direct		$	(21,092)	$	48,071
Assumed		(207)		(25)
Ceded		1,985		(8,410)
Losses incurred, net		$	(19,314)	$	39,636

(1)Ceded premiums earned net of profit commission.

Quota share reinsurance

We have entered into quota share reinsurance ("QSR") transactions with panels of third-party reinsurers to cede a fixed quota share percentage of premiums earned and received and losses incurred on insurance covered by the transactions. We receive the benefit of a ceding commission equal to 20% of premiums ceded before profit commission. We also receive the benefit of a profit commission through a reduction of premiums we cede. The profit commission varies inversely with the level of losses on a “dollar for dollar” basis and can be eliminated at annual loss ratios higher than we have experienced on our QSR Transactions.

Each of our QSR Transactions typically have annual loss ratio caps of 300% and lifetime loss ratios of 200%.

Table 4.2 below provides additional detail regarding our QSR Transactions.

Quota Share Reinsurance
Table	4.2
Quota Share Contract		Covered Policy Years	Quota Share %		Annual Loss Ratio to Exhaust Profit Commission (1)		Contractual Termination Date
2015 QSR		Prior to 2017	15.0	%	68.0	%	December 31, 2031
2019 QSR		2019	30.0	%	62.0	%	December 31, 2030
2020 QSR		2020	12.5	%	62.0	%	December 31, 2031
2020 QSR and 2021 QSR		2020	17.5	%	62.0	%	December 31, 2032
2020 QSR and 2021 QSR		2021	17.5	%	61.9	%	December 31, 2032
2021 QSR and 2022 QSR		2021	12.5	%	57.5	%	December 31, 2032
2021 QSR and 2022 QSR		2022	15.0	%	57.5	%	December 31, 2033
2022 QSR and 2023 QSR		2022	15.0	%	62.0	%	December 31, 2033
2022 QSR and 2023 QSR		2023	15.0	%	62.0	%	December 31, 2034
Credit Union QSR (2)		2020-2025	65.0	%	50.0	%	December 31, 2039

(1) We will receive a profit commission provided the annual loss ratio on policies covered under the transaction remains below this ratio.

(2) Eligible credit union business written before April 1, 2020 was covered by our 2019 and prior QSR Transactions.

We can elect to terminate the QSR Transactions under specified scenarios without penalty upon prior written notice, including if we will receive less than 90% (80% for the Credit Union QSR Transaction ) of the full credit amount under the PMIERs, full financial statement credit or full credit under applicable regulatory capital requirements for the risk ceded in any required calculation period.

Table 4.3 provides additional detail regarding optional termination dates and optional reductions to our quota share percentage which can, in each case, be elected by us for a fee. Under the optional reduction to the quota share percentage, we may reduce our quota share percentage from the original percentage shown in table 4.2 to the percentage shown in table 4.3.

Quota Share Reinsurance
Table	4.3
Quota Share Contract		Optional Termination Date (1)	Optional Quota Share % Reduction Date (2)	Optional Reduced Quota Share %
2015 QSR		June 30, 2021	NA	NA
2019 QSR		July 1, 2022	July 1, 2022	25% or 20%
2020 QSR		December 31, 2022	July 1, 2022	10.5% or 8%
2020 QSR and 2021 QSR, 2020 Policy year		December 31, 2022	July 1, 2022	14.5% or 12%
2020 QSR and 2021 QSR, 2021 Policy year		December 31, 2023	July 1, 2022	14.5% or 12%
2021 QSR and 2022 QSR. 2021 Policy Year		December 31, 2023	July 1, 2022	10.5% or 8%
2021 QSR and 2022 QSR, 2022 Policy Year		December 31, 2024	July 1, 2023	12.5% or 10%
2022 QSR and 2023 QSR, 2022 Policy Year		December 31, 2024	July 1, 2023	12.5% or 10%
2022 QSR and 2023 QSR, 2023 Policy Year		December 31, 2025	July 1, 2024	12.5% or 10%

(1) We can elect early termination of the QSR Transaction beginning on this date, and bi-annually thereafter.

(2) We can elect to reduce the quota share percentage beginning on this date, and bi-annually thereafter.

See Note 9 “Reinsurance” in our Annual Report on Form 10-K for the year ended December 31, 2021 for information about the termination of our 2017 and 2018 QSR Transactions, which resulted in a reinsurance recoverable on paid losses of $36 million for loss and loss adjustment expenses (“LAE”) reserves incurred at the time of termination.

Table 4.4 below provides a summary of our QSR Transactions, for the three months ended March 31, 2022 and 2021.

Quota Share Reinsurance
Table	4.4
		Three Months Ended March 31,
(In thousands)		2022		2021
Ceded premiums written and earned, net of profit commission		$	22,378	$	33,390
Ceded losses incurred		(1,985)		8,405
Ceding commissions (1)		12,272		13,067
Profit commission		38,980		31,944

(1) Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations.

Ceded losses incurred for the three months ended March 31, 2022 reflect favorable loss reserve development primarily related to delinquencies received in the second and third quarters of 2020 (“Peak COVID-19” delinquencies). See Note 11 - “Loss Reserves” for discussion of our loss reserves.

Under the terms of our QSR Transactions, ceded premiums, ceding commissions, profit commission, and ceded paid loss and LAE are settled net on a quarterly basis. The ceded premiums due after deducting the related ceding commission and profit commission is reported within Other liabilities on the consolidated balance sheets.

The reinsurance recoverable on loss reserves related to our QSR Transactions was $64.7 million as of March 31, 2022 and $66.9 million as of December 31, 2021. The reinsurance recoverable balance is secured by funds on deposit from the reinsurers, the minimum amount of which is based on the greater of 1) a reinsurer's funding requirements under PMIERs or 2) ceded reserves and unpaid losses. Each of the reinsurers under our quota share reinsurance agreements described above has an insurer financial strength rating of A- or better (or a comparable rating) by Standard and Poor's Rating Services, A.M. Best, Moody's, or a combination of the three..

Excess of loss reinsurance

We have aggregate excess of loss reinsurance transactions (“Home Re Transactions”) with unaffiliated special purpose insurers (“Home Re Entities”). For the reinsurance coverage periods, we retain the first layer of the respective aggregate losses paid, and a Home Re Entity will then provide second layer coverage up to the outstanding reinsurance coverage amount. We retain losses paid in excess of the outstanding reinsurance coverage amount. Subject to certain conditions, the reinsurance coverage decreases over a period of either 10 or 12.5 years, depending on the transaction, as the underlying covered mortgages amortize or are repaid, or mortgage insurance losses are paid.

The Home Re Entities financed the coverages by issuing mortgage insurance-linked notes (“ILNs”) to unaffiliated investors in an aggregate amount equal to the initial reinsurance coverage amounts. Each ILN is non-recourse to any assets of MGIC or affiliates. The proceeds of the ILNs, which were deposited into reinsurance trusts for the benefit of MGIC, will be the source of reinsurance claim payments to MGIC and principal repayments on the ILNs.

When a “Trigger Event” is in effect, payment of principal on the related notes will be suspended and the reinsurance coverage available to MGIC under the transactions will not be reduced by such principal payments. As of March 31, 2022 a "Trigger Event" has occurred on our Home Re 2018-1 and Home Re 2019-1 ILN transactions because the reinsured principal balance of loans that were reported 60 or more days delinquent exceeded a percentage of the total reinsured principal balance of loans specified under each transaction. A “Trigger Event” has also occurred on the Home Re 2021-2 ILN transaction because the credit enhancement of the most senior tranche is less than the target credit enhancement.

Table 4.5 provides a summary of our Home Re Transactions as of March 31, 2022 and December 31, 2021.

Excess of Loss Reinsurance
Table 4.5
($ in thousands)	Home Re 2021-2, Ltd.	Home Re 2021-1, Ltd.	Home Re 2020-1, Ltd.	Home Re 2019-1, Ltd.	Home Re 2018-1, Ltd.
Issue Date	August 3, 2021	February 2, 2021	October 29, 2020	May 25, 2019	October 30, 2018
Policy Inforce Dates	January 1, 2021 - May 28, 2021	August 1, 2020 - December 31, 2020	January 1, 2020 - July 31, 2020	January 1, 2018 - March 31, 2019	July 1, 2016 - December 31, 2017
Optional Call Date (1)	July 25, 2028	January 25, 2028	October 25, 2027	May 25, 2026	October 25, 2025
Legal Maturity	12.5 years	12.5 years	10 years	10 years	10 years
Initial First Layer Retention	190,159	211,159	275,283	185,730	168,691
Initial Excess of Loss Reinsurance Coverage	398,429	398,848	412,917	315,739	318,636
March 31, 2022
Remaining First Layer Retention	190,159	211,142	275,172	183,807	165,179
Remaining Excess of Loss Reinsurance Coverage	398,429	361,362	196,552	208,146	218,343
December 31, 2021
Remaining First Layer Retention	190,159	211,142	275,204	183,917	165,365
Remaining Excess of Loss Reinsurance Coverage	398,429	387,830	234,312	208,146	218,343

(1) We have the right to terminate the Home Re Transactions under certain circumstances and on any payment date on or after the respective Optional Call Date.

In April 2022, MGIC entered into a $473.6 million excess-of-loss reinsurance agreement (executed through an insurance linked note transaction) that covers policies with inforce dates from May 29, 2021 through December 31, 2021.

The reinsurance premiums ceded to each Home Re Entity are composed of coverage, initial expense and supplemental premiums. The coverage premiums are generally calculated as the difference between the amount of interest payable by the Home Re Entity on the remaining reinsurance coverage levels, and the investment income collected on the collateral assets held in a reinsurance trust account and used to collateralize the Home Re Entity’s reinsurance obligation to MGIC. The amount of monthly reinsurance coverage premium ceded will fluctuate due to changes in the reference rate and changes in money market rates that affect investment income collected on the assets in the reinsurance trust. The Home Re 2021-2 Transaction references SOFR, while the remaining Home Re Transactions reference one-month LIBOR. As a result, we concluded that each Home Re transaction contains an embedded derivative that is accounted for separately as a freestanding derivative. The fair values of the derivatives at March 31, 2022, were not material to our consolidated balance sheet, and the change in fair value during the three months ended March 31, 2022 was not material to our consolidated statements of operations. Total ceded premiums under the Home Re transaction were $11.8 million for the three months ended March 31, 2022, and $10.3 million for the three months ended March 31, 2021.

At the time the Home Re Transactions were entered into, we concluded that each Home Re Entity is a variable interest entity (“VIE”). A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make sufficient decisions relating to the entity’s operations through voting rights or do not substantively participate in gains and losses of the entity. Given that MGIC (1) does not have the unilateral power to direct the activities that most significantly affect each Home Re Entity’s economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits of each Home Re Entity that could be significant to the Home Re Entity, consolidation of the Home Re Entities is not required.

We are required to disclose our maximum exposure to loss, which we consider to be an amount that we could be required to record in our statements of operations, as a result of our involvement with the VIEs under our Home Re Transactions. As of March 31, 2022, and December 31, 2021, we did not have material exposure to the VIEs as we have no investment in the VIEs and had no reinsurance claim payments due from the VIEs under our reinsurance transactions. We are unable to determine the timing or extent of claims from losses that are ceded under the reinsurance transactions. The VIE assets are deposited in reinsurance trusts for the benefit of MGIC that will be the source of reinsurance claim payments to MGIC. The purpose of the reinsurance trusts is to provide security to MGIC for the obligations of the VIEs under the reinsurance transactions. The trustee of the reinsurance trusts, a recognized provider of corporate trust services, has established segregated accounts within the reinsurance trusts for the benefit of MGIC, pursuant to the trust agreements. The trust agreements are governed by, and construed in accordance with, the laws of the State of New York. If the trustee of the reinsurance trusts failed to distribute claim payments to us as provided in the reinsurance trusts, we would incur a loss related to our losses ceded under the reinsurance transactions and deemed unrecoverable. We are also unable to determine the impact such possible failure by the trustee to perform pursuant to the reinsurance trust agreements may have on our consolidated financial statements. As a result, we are

unable to quantify our maximum exposure to loss related to our involvement with the VIEs. MGIC has certain termination rights under the reinsurance transactions should its claims not be paid. We consider our exposure to loss from our reinsurance transactions with the VIEs to be remote.

Table 4.6 presents the total assets of the Home Re Entities as of March 31, 2022 and December 31, 2021.

Home Re total assets
Table	4.6
(In thousands)
Home Re Entity		Total VIE Assets
March 31, 2022
Home Re 2018-1 Ltd.		$	218,343
Home Re 2019-1 Ltd.		208,146
Home Re 2020-1 Ltd.		209,686
Home Re 2021-1 Ltd.		370,621
Home Re 2021-2 Ltd.		398,429
December 31, 2021
Home Re 2018-1 Ltd.		$	218,343
Home Re 2019-1 Ltd.		208,146
Home Re 2020-1 Ltd.		251,387
Home Re 2021-1 Ltd.		398,848
Home Re 2021-2 Ltd.		398,429

The reinsurance trust agreements provide that the trust assets may generally only be invested in certain money market funds that (i) invest at least 99.5% of their total assets in cash or direct U.S. federal government obligations, such as U.S. Treasury bills, as well as other short-term securities backed by the full faith and credit of the U.S. federal government or issued by an agency of the U.S. federal government, (ii) have a principal stability fund rating of “AAAm” by S&P or a money market fund rating of “Aaamf” by Moody’s as of the Closing Date and thereafter maintain any rating with either S&P or Moody’s, and (iii) are permitted investments under the applicable credit for reinsurance laws and applicable PMIERs credit for reinsurance requirements.

The total calculated PMIERs credit for risk ceded under our Home Re Transactions is generally based on the PMIERs requirement of the covered policies and the attachment and detachment points of the coverage, all of which fluctuate over time. (see Note 1 - “Nature of Business and Basis of Presentation”).