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Reinsurance | 6 Months Ended
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Jun. 30, 2021
Reinsurance Disclosures [Abstract] |
Reinsurance | Reinsurance The reinsurance agreements to which we are a party, excluding captive agreements (which were immaterial), 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 June 30, |  | Six Months Ended June 30,
(In thousands) |  | 2021 |  | 2020 |  | 2021 |  | 2020
Premiums earned: |  |  |  |  |  |  |  |
Direct |  | $ | 293,047 |  |  | $ | 305,921 |  |  | $ | 589,318 |  |  | $ | 595,789 |
Assumed |  | 2,480 |  |  | 3,381 |  |  | 4,891 |  |  | 5,990 |
Ceded (1) |  | (43,988) |  |  | (65,740) |  |  | (87,625) |  |  | (97,316) |
Net premiums earned |  | $ | 251,539 |  |  | $ | 243,562 |  |  | $ | 506,584 |  |  | $ | 504,463 |
Losses incurred: |  |  |  |  |  |  |  |
Direct |  | $ | 37,983 |  |  | $ | 256,224 |  |  | $ | 86,054 |  |  | $ | 322,786 |
Assumed |  | 79 |  |  | 133 |  |  | 54 |  |  | 299 |
Ceded |  | (8,898) |  |  | (38,983) |  |  | (17,308) |  |  | (44,755) |
Losses incurred, net |  | $ | 29,164 |  |  | $ | 217,374 |  |  | $ | 68,800 |  |  | $ | 278,330 |
(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.
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
2017 QSR |  | 2017 | 30.0 | % |  | 60.0 | % |  | December 31, 2028
2018 QSR |  | 2018 | 30.0 | % |  | 62.0 | % |  | December 31, 2029
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 - 2021 | 17.5 | % |  | 62.0 | % |  | December 31, 2032
2021 QSR |  | 2021 |  | 12.5 | % |  | 57.5 | % |  | December 31, 2032
2022 QSR |  | 2022 |  | 15.0 | % |  | 57.5 | % |  | December 31, 2033
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. The optional reduction to the quota share percentage would give us an option to reduce our quota share percentage from the original percentage shown in table 4.2 to the percentage shown in table 4.3.
Reinsurance
Table | 4.3 |  |  |  |  |  |  |
Quota Share Contract |  | Optional Termination Date (1) | Optional Quota Share % Reduction Date (2) |  | Quota Share % Reduction |
2015 QSR |  | June 30, 2021 | NA |  | NA |
2017 QSR |  | December 31, 2021 | NA |  | NA |
2018 QSR |  | December 31, 2021 | NA |  | NA |
2019 QSR |  | December 31, 2021 | July 1, 2020 |  | 25% or 20% |
2020 QSR |  | December 31, 2022 | July 1, 2021 |  | 10.5% or 8% |
2020 QSR and 2021 QSR, 2020 Policy year |  | December 31, 2022 | July 1, 2021 |  | 14.5% or 12% |
2020 QSR and 2021 QSR, 2021 Policy year |  | December 31, 2023 | July 1, 2022 |  | 14.5% or 12% |
2021 QSR |  | December 31, 2023 | July 1, 2022 |  | 10.5% or 8% |
2022 QSR |  | December 31, 2024 | July 1, 2023 |  | 12.5% or 10% |
(1) We can elect early termination of the QSR Transaction beginning on this date, and bi-annually thereafter for the 2015 QSR, 2019 QSR, 2020 QSR, 2021 QSR, and 2022 QSR. Early termination of the 2018 QSR can be elected on this date and annually thereafter. (2) We can elect to reduce the quota share percentage beginning on this date, and bi-annually thereafter. Table 4.4 below provides a summary of our QSR Transactions, excluding captive agreements, for the three and six months ended June 30, 2021 and 2020.
Quota Share Reinsurance |  |  |  |
Table | 4.4 |  |  |  |  |  |  |  |
|  |  | Three Months Ended June 30, |  | Six Months Ended June 30,
(In thousands) |  | 2021 |  | 2020 |  | 2021 |  | 2020
Ceded premiums written and earned, net of profit commission |  | $ | 33,983 |  |  | $ | 61,357 |  |  | $ | 67,373 |  |  | $ | 88,203 |
Ceded losses incurred |  | 8,903 |  |  | 38,982 |  |  | 17,308 |  |  | 44,786 |
Ceding commissions (1) | 12,991 |  |  | 12,025 |  |  | 26,058 |  |  | 23,390 |
Profit commission |  | 30,978 |  |  | (1,231) |  |  | 62,922 |  |  | 28,748 |
(1)Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations. Under the terms of our QSR Transactions, currently in effect, 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 $111.2 million as of June 30, 2021 and $95.0 million as of December 31, 2020. The reinsurance recoverable balance is secured by funds on deposit from the reinsurers, the minimum amount of which is based on the greater of a reinsurer’s funding requirements under PMIERs or ceded reserves. An allowance for credit losses was not required at June 30, 2021. Excess of loss reinsurance We have aggregate excess of loss reinsurance transactions (“Home Re Transactions”) with unaffiliated special purpose insurers domiciled in Bermuda (“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. MGIC has rights to terminate the Home Re Transactions under certain circumstances. 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. The Home Re 2018-1, Home Re 2019-1, and Home Re 2020-1 ILNs each have ten-year legal maturities and the Home Re 2021-1 ILN has a twelve and a half year legal maturity, and 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 June 30, 2021 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 4% of the total reinsured principal balance of loans under each transaction. A “Trigger Event” has also occurred on the Home Re 2021-1 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 June 30, 2021 and December 31, 2020.
Excess of Loss Reinsurance |  |  |  |
Table 4.5 |  |  |  |
($ in thousands) | Home Re 2021-1, Ltd. | Home Re 2020-1, Ltd. | Home Re 2019-1, Ltd. | Home Re 2018-1, Ltd.
Issue Date | February 2, 2021 | October 29, 2020 | May 25, 2019 | October 30, 2018
Policy Inforce Dates | 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) | January 25, 2028 | October 25, 2027 | May 25, 2026 | October 25, 2025
Initial First Layer Retention | 211,159 | 275,283 | 185,730 | 168,691
Initial Excess of Loss Reinsurance Coverage | 398,848 | 412,917 | 315,739 | 318,636
June 30, 2021 |  |  |  |
Remaining First Layer Retention | 211,159 | 275,268 | 184,278 | 165,538
Remaining Excess of Loss Reinsurance Coverage | 398,848 | 352,099 | 208,146 | 218,343
December 31, 2020 |  |  |  |
Remaining First Layer Retention | — | 275,283 | 184,514 | 166,005
Remaining Excess of Loss Reinsurance Coverage | — | 412,917 | 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 August 2021, MGIC entered into a $398.4 million Home Re Transaction that covers policies with inforce dates from January 1, 2021 through May 28, 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 Transaction closing in August 2021 references SOFR, while the remaining Home Re Transactions reference the 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 June 30, 2021, were not material to our consolidated balance sheet, and the change in fair value during the three and six months ended June 30, 2021 was not material to our consolidated statements of operations. Total ceded premiums were $10.0 million and $20.3 million for the three and six months ended June 30, 2021, and $4.4 million and $9.1 million for the three and six months ended June 30, 2020, respectively. 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 potentially 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, 2021, and December 31, 2020, 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 Home Re 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 June 30, 2021 and December 31, 2020.
Home Re total assets
Table | 4.6 |  |
(In thousands) |  |
Home Re Entity (Issue date) |  | Total VIE Assets
June 30, 2021 |  |
Home Re 2018-1 Ltd. |  | $ | 218,343 |
Home Re 2019-1 Ltd. |  | 208,146 |
Home Re 2020-1 Ltd. |  | 372,414 |
Home Re 2021-1 Ltd. |  | 398,848 |
December 31, 2020 |  |
Home Re 2018-1 Ltd. |  | $ | 218,343 |
Home Re 2019-1 Ltd. |  | 208,146 |
Home Re 2020-1 Ltd. |  | 412,917 |
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 “Aaa-mf” 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 and is subject to a modest reduction under the PMIERs financial requirements (see Note 1 - “Nature of Business and Basis of Presentation”).

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- Definition The entire disclosure pertaining to the existence, magnitude and information about insurance that has been ceded to or assumed from another insurance company, including the methodologies and assumptions used in determining recorded amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 944 -URI http://asc.fasb.org/topic&trid=2303980 + Details
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