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 June 30, Six Months Ended June 30, (In thousands) 2024 2023 2024 2023 Premiums earned: Direct $ 283,363 $ 284,636 $ 567,384 $ 570,670 Assumed 3,377 3,047 6,819 5,834 Ceded - quota share reinsurance (1) (26,643) (27,442) (55,358) (57,319) Ceded - excess-of-loss reinsurance (16,569) (17,430) (32,673) (34,359) Total ceded (43,212) (44,872) (88,031) (91,678) Net premiums earned $ 243,528 $ 242,811 $ 486,172 $ 484,826 Losses incurred: Direct $ (14,196) $ (15,706) $ (3,217) $ (4,583) Assumed (46) (31) (17) (27) Ceded - quota share reinsurance (4,030) (1,954) (10,483) (6,635) Losses incurred, net $ (18,272) $ (17,691) $ (13,717) $ (11,245) Other Reinsurance Impacts: Profit commission on quota share reinsurance (1) $ 27,301 $ 34,809 $ 51,885 $ 66,520 Ceding commission on quota share reinsurance 10,789 12,450 21,449 24,768 (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 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 certain annual loss ratios as defined below. Ceded losses incurred are impacted by the delinquencies covered by our QSR Transactions, our estimates of payments that will be ultimately made on those delinquencies, and claim payments covered by our QSR Transactions. Each of our QSR Transactions typically have annual loss ratio caps of 300% and lifetime loss ratio caps 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 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 2024 QSR 2024 30.0 % 56.0 % ' December 31, 2035 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 and 2021 QSR 2021 December 31, 2024 July 1, 2024 14.5% or 12% 2021 QSR and 2022 QSR 2021 December 31, 2024 July 1, 2024 10.5% or 8% 2021 QSR and 2022 QSR 2022 December 31, 2024 July 1, 2024 12.5% or 10% 2022 QSR and 2023 QSR 2022 December 31, 2024 July 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% 2024 QSR 2024 December 31, 2027 December 31, 2027 23% or 15% (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. 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 $42.3 million as of June 30, 2024 and $33.3 million as of December 31, 2023. 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”). For policies covered under our Traditional XOL Transactions, 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 under 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 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 June 30, 2024, 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. A “Trigger Event” has also occurred on the Home Re 2023-1 transaction because the target level of credit enhancement on the most senior tranche has not been met. In January 2024, we exercised our optional call feature to terminate the reinsurance agreement with Home Re 2020-1, Ltd. In connection with the termination, the insurance linked notes issued by Home Re 2020-1 Ltd. were redeemed in full. Table 4.4a, 4.4b, and 4.4c provide a summary of our XOL Transactions as of June 30, 2024 and December 31, 2023. Tables 4.4b and 4.4c exclude the 2024 Traditional XOL which is still in its fill up period. Excess of Loss Reinsurance Table 4.4a ($ in thousands) Issue Date Policy In force Dates Optional Call Date (1) Legal Maturity 2024 Traditional XOL (2) April 1, 2024 January 1, 2024 - December 31, 2024 January 1, 2030 10 years 2023 Traditional XOL April 1, 2023 January 1, 2023 - December 29, 2023 January 1, 2031 10 years 2022 Traditional XOL April 1, 2022 January 1, 2022 - December 30, 2022 January 1, 2030 10 years Home Re 2023-1, Ltd. October 23, 2023 June 1, 2022 - August 31, 2023 October 25, 2028 10 years Home Re 2022-1, Ltd. April 26, 2022 May 29, 2021 - December 31, 2021 April 25, 2028 12.5 years Home Re 2021-2, Ltd. August 3, 2021 January 1, 2021 - May 28, 2021 July 25, 2028 12.5 years Home Re 2021-1, Ltd. February 2, 2021 August 1, 2020 - December 31, 2020 January 25, 2028 12.5 years Home Re 2019-1, Ltd. May 25, 2019 January 1, 2018 - March 31, 2019 May 25, 2026 10 years Home Re 2018-1, Ltd. October 30, 2018 July 1, 2016 - December 31, 2017 October 25, 2025 10 years (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 2024 Traditional XOL Transaction provides up to $187 million of reinsurance coverage on eligible NIW in 2024. Excess of Loss Reinsurance Table 4.4b Remaining First Layer Retention ($ in thousands) Initial First Layer Retention June 30, 2024 December 31, 2023 2023 Traditional XOL $ 70,578 $ 70,544 $ 70,578 2022 Traditional XOL 82,523 81,999 82,346 Home Re 2023-1, Ltd. 272,961 272,850 272,961 Home Re 2022-1, Ltd. 325,589 323,797 325,001 Home Re 2021-2, Ltd. 190,159 189,007 189,403 Home Re 2021-1, Ltd. 211,159 210,376 210,831 Home Re 2020-1, Ltd. 275,283 — 261,280 Home Re 2019-1, Ltd. 185,730 182,464 182,722 Home Re 2018-1, Ltd. 168,691 164,108 164,335 Table 4.4c Remaining Excess of Loss Reinsurance Coverage (1) ($ in thousands) Initial Excess of Loss Reinsurance Coverage (1) Initial Funding Percentage (2) Funding Percentage at 6/30/2024 (2) June 30, 2024 December 31, 2023 2023 Traditional XOL $ 96,942 N/A N/A $ 95,034 $ 96,942 2022 Traditional XOL 142,642 N/A N/A 136,629 142,642 Home Re 2023-1, Ltd. 330,277 97 % 97 % 330,277 330,277 Home Re 2022-1, Ltd. 473,575 100 % 100 % 368,553 420,731 Home Re 2021-2, Ltd. (3) 398,429 100 % 79 % 162,140 173,960 Home Re 2021-1, Ltd. (3) 398,848 100 % 83 % 117,564 117,982 Home Re 2020-1, Ltd. 412,917 100 % — % — 41,846 Home Re 2019-1, Ltd. (3) 315,739 100 % 10 % 21,039 21,039 Home Re 2018-1, Ltd. 318,636 100 % 100 % 38,998 69,762 (1) The initial and remaining excess of loss reinsurance coverage is reduced by the applicable funding percentage. (2) The funding percentage represents the aggregate outstanding note balances divided by the aggregate ending coverage amounts. (3) The funding percentage on the 2021-1, 2021-2, and 2019-1 were reduced from 100% after the tender offers were conducted in the fourth quarter of 2023. 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. 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 June 30, 2024 and December 31, 2023, were not material to our consolidated balance sheet and the change in fair value during the three and six months ended June 30, 2024 and June 30, 2023 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, outside the terms of the reinsurance agreement, 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 June 30, 2024, and December 31, 2023, 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 June 30, 2024 and December 31, 2023. Home Re total assets Table 4.5 (In thousands) Total VIE Assets Home Re Entity June 30, 2024 December 31, 2023 Home Re 2023-1 Ltd. $ 330,277 $ 330,277 Home Re 2022-1 Ltd. 378,663 427,279 Home Re 2021-2 Ltd. 165,994 174,431 Home Re 2021-1 Ltd. 117,633 118,043 Home Re 2020-1 Ltd. — 41,846 Home Re 2019-1 Ltd. 21,039 21,039 Home Re 2018-1 Ltd. 47,439 73,872 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” .) |