Reinsurance

9 Months Ended

Sep. 30, 2023

Reinsurance Disclosures [Abstract]

Reinsurance

Reinsurance

We have in place reinsurance agreements executed under quota share reinsurance (“QSR”) transactions and excess-of-loss (“XOL”) transactions as discussed below. The effect of all of our reinsurance transactions on our consolidated statement of operations is shown in table 4.1 below.

Reinsurance
Table	4.1
		Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)		2023		2022		2023		2022
Premiums earned:
Direct		$	287,640	$	289,072	$	858,310	$	864,191
Assumed		3,801		2,254		9,635		6,501
Ceded - quota share reinsurance (1)		(32,693)		(19,348)		(90,012)		(56,721)
Ceded - excess-of-loss reinsurance		(17,471)		(19,867)		(51,830)		(50,923)
Total ceded		(50,164)		(39,215)		(141,842)		(107,644)
Net premiums earned		$	241,277	$	252,111	$	726,103	$	763,048
Losses incurred:
Direct		$	6,627	$	(112,435)	$	2,044	$	(242,861)
Assumed		20		21		(7)		(340)
Ceded - quota share reinsurance		(6,724)		7,360		(13,359)		19,775
Losses incurred, net		$	(77)	$	(105,054)	$	(11,322)	$	(223,426)
Other Reinsurance Impacts:
Profit commission on quota share reinsurance (1)		$	30,698	$	47,255	$	97,218	$	135,049
Ceding commission on quota share reinsurance		12,678		13,321		37,446		38,355

(1)Ceded premiums earned are shown net of profit commission.

Quota share reinsurance

We have entered into 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
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
2023 QSR		2023	10.0	%	58.5	%	December 31, 2034
Credit Union QSR		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.

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 details 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	Covered Policy Years	Optional Termination Date (1)	Optional Quota Share % Reduction Date (2)	Optional Reduced Quota Share %
2020 QSR	2020	December 31, 2023	January 1, 2024	10.5% or 8%
2020 QSR and 2021 QSR	2020	December 31, 2023	January 1, 2024	14.5% or 12%
2020 QSR and 2021 QSR	2021	December 31, 2023	January 1, 2024	14.5% or 12%
2021 QSR and 2022 QSR	2021	December 31, 2023	January 1, 2024	10.5% or 8%
2021 QSR and 2022 QSR	2022	December 31, 2024	January 1, 2024	12.5% or 10%
2022 QSR and 2023 QSR	2022	December 31, 2024	January 1, 2024	12.5% or 10%
2022 QSR and 2023 QSR	2023	December 31, 2025	July 1, 2024	12.5% or 10%
2023 QSR	2023	December 31, 2025	July 1, 2024	8% or 7%

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

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

We have elected to terminate our 2020 QSR Transaction effective December 31, 2023 and will incur an early termination fee in the fourth quarter of approximately $5 million.

We agreed to terms on a 30% QSR Transaction with a group of unaffiliated reinsurers covering most of our new insurance written in 2024.

Under the terms of our QSR Transactions, ceded premiums earned, ceding commissions, profit commission, and ceded paid loss and LAE are settled net on a quarterly basis. The ceded premiums earned 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 $40.9 million as of September 30, 2023 and $28.2 million as of December 31, 2022. The reinsurance recoverable balance is secured by funds on deposit from reinsurers (which does not include letters of credit), 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 QSR Transactions 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 XOL Transactions with a panel of unaffiliated reinsurers executed through the traditional reinsurance market (“Traditional XOL Transactions”) and with unaffiliated special purpose insurers (“Home Re Transactions”).

We have entered into Traditional XOL Transactions with panels of third-party reinsurers. For the covered policies, we retain the first layer of the aggregate losses paid, and the reinsurers 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. The reinsurance coverage is subject to adjustment based on the risk characteristics of the covered loans until the initial excess of loss reinsurance coverage layer has been finalized.

We can elect to terminate our Traditional XOL Transactions under specified scenarios without penalty upon prior written notice, including if we will receive less than 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. The reinsurance premiums ceded to the Traditional XOL Transactions are based off the remaining reinsurance coverage levels. The reinsured coverage levels are secured by funds on deposit from reinsurers (which does not include letters of credit), 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 Traditional XOL Transactions 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.

The Home Re Transactions are executed 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 as the underlying covered mortgages amortize or are repaid, or mortgage insurance losses are paid.

The Home Re Entities financed the collateral for 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.

Payment of principal on the related insurance-linked notes will be suspended and the reinsurance coverage available to MGIC under the transactions will not be reduced by such principal payments until a target level of credit enhancement is obtained or if certain thresholds or “Trigger Events” are reached, as defined in the related insurance-linked notes transaction agreement. As of September 30, 2023, a "Trigger Event" has occurred on our Home Re 2019-1 ILN transaction 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.

In October 2023, Home Re 2019-1 Ltd., Home Re 2021-1 Ltd., and Home Re 2021-2 Ltd conducted tender offers for certain tranches of the mortgage insurance-linked notes that supported the reinsurance agreements with MGIC. The tender offer resulted in the reduction in the insurance-linked notes of $187.1 million for the Home Re 2019-1 Ltd, $91.1 million for the Home Re 2021-1 Ltd., and $106.7 million for the Home Re 2021-2 Ltd. The reinsurance coverage corresponding to the tendered notes was terminated. MGIC will incur approximately $8 million of additional ceded premium in the fourth quarter associated with the cost of the tender premiums and associated expenses.

Also in October, 2023, MGIC entered into a $330.2 million excess-of-loss reinsurance agreement (executed through an insurance linked note transaction) that covers policies with inforce dates from June 1, 2022 through August 31, 2023.

Table 4.4a provides a summary of our XOL Transactions as of September 30, 2023.

Excess of Loss Reinsurance
Table 4.4a
($ in thousands)	Issue Date	Policy In force Dates	Optional Call Date (1)	Legal Maturity	Initial First Layer Retention	Initial Excess of Loss Reinsurance Coverage
2023 Traditional XOL (2)	April 1, 2023	January 1, 2023 - December 29, 2023	January 1, 2031	10 years	TBD	TBD
2022 Traditional XOL	April 1, 2022	January 1, 2022 - December 30, 2022	January 1, 2030	10 years	$82,523	$142,642
Home Re 2022-1, Ltd.	April 26, 2022	May 29, 2021 - December 31, 2021	April 25, 2028	12.5 years	325,589	473,575
Home Re 2021-2, Ltd.	August 3, 2021	January 1, 2021 - May 28, 2021	July 25, 2028	12.5 years	190,159	398,429
Home Re 2021-1, Ltd.	February 2, 2021	August 1, 2020 - December 31, 2020	January 25, 2028	12.5 years	211,159	398,848
Home Re 2020-1, Ltd.	October 29, 2020	January 1, 2020 - July 31, 2020	October 25, 2027	10 years	275,283	412,917
Home Re 2019-1, Ltd.	May 25, 2019	January 1, 2018 - March 31, 2019	May 25, 2026	10 years	185,730	315,739
Home Re 2018-1, Ltd.	October 30, 2018	July 1, 2016 - December 31, 2017	October 25, 2025	10 years	168,691	318,636

(1) We have the right to terminate the Home Re Transactions under certain circumstances, including an optional call feature that provides us the right to terminate if the outstanding principal balance of the related insurance-linked notes falls below 10% of the initial principal balance of the related insurance-linked notes, and on any payment date on or after the respective Optional Call Date. We can elect early termination of the Traditional XOL Transactions beginning on this date, and quarterly thereafter.

(2) The 2023 Traditional XOL Transaction provides up to $116 million of reinsurance coverage on eligible NIW in 2023.

Table 4.4b provides a summary of the remaining first layer retention and remaining excess of loss reinsurance coverage on our XOL Transactions as of September 30, 2023 and December 31, 2022.

Table 4.4b	Remaining First Layer Retention				Remaining Excess of Loss Reinsurance Coverage
($ in thousands)	September 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
2022 Traditional XOL	$	82,463	$	82,517	$	142,642	$	142,642
Home Re 2022-1, Ltd.	325,104		325,576		445,461		473,575
Home Re 2021-2, Ltd.	189,610		190,097		281,919		352,084
Home Re 2021-1, Ltd.	210,858		211,102		209,311		277,053
Home Re 2020-1, Ltd.	274,968		275,051		53,023		113,247
Home Re 2019-1, Ltd.	182,791		183,540		208,146		208,146
Home Re 2018-1, Ltd.	164,385		164,849		84,819		140,993

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 used to collateralize the Home Re Entity’s reinsurance obligation to MGIC. The amount of monthly reinsurance coverage premium ceded on the Home Re Transactions 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 and Home Re 2022-1 Transactions reference SOFR. The remaining Home Re Transactions referenced one-month LIBOR, and transitioned to SOFR when the one-month LIBOR rate was no longer published. 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 September 30, 2023 and December 31, 2022, were not material to our consolidated balance sheet and the changes in fair value during the three and nine months ended September 30, 2023 and September 30, 2022 were not material to our consolidated statements of operations. (See Note 7 - “Investments” and Note 8 - “Fair Value Measurements”.)

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 September 30, 2023, and December 31, 2022, 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 4.5 presents the total assets of the Home Re Entities as of September 30, 2023 and December 31, 2022.

Home Re total assets
Table	4.5
(In thousands)		Total VIE Assets
Home Re Entity		September 30, 2023		December 31, 2022
Home Re 2022-1 Ltd.		$	454,943	$	473,575
Home Re 2021-2 Ltd.		282,328		357,340
Home Re 2021-1 Ltd.		209,384		285,039
Home Re 2020-1 Ltd.		58,371		119,159
Home Re 2019-1 Ltd.		208,146		208,146
Home Re 2018-1 Ltd.		89,405		146,822

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 XOL Transactions are 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”.)