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Reinsurance | 12 Months Ended
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Dec. 31, 2021
Reinsurance Disclosures [Abstract] |
Reinsurance |
NOTE 9 |  | Reinsurance
Our consolidated financial statements reflect the effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to the acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance involves transferring certain insurance risks (along with, in the case of quota share reinsurance, the related earned premiums) we have underwritten to other insurance companies who agree to share these risks. The purpose of ceded reinsurance is to protect us, at a cost, against losses arising from our mortgage guaranty policies covered by the agreement and to manage our capital requirements under PMIERs. Reinsurance is currently placed on a quota share and excess of loss basis but we also have immaterial captive reinsurance agreements that were in effect through December 31, 2020. Table 9.1 below shows the effect of all reinsurance agreements on premiums earned and losses incurred as reflected in the consolidated statements of operations.
Reinsurance
Table | 9.1 |  |  |  |  |  |
|  | Years ended December 31,
(In thousands) |  | 2021 |  | 2020 |  | 2019
Premiums earned: |  |  |  |  |  |
Direct |  | $ | 1,167,592 |  |  | $ | 1,199,824 |  |  | $ | 1,155,240 |
Assumed |  | 9,858 |  |  | 10,848 |  |  | 5,085 |
Ceded |  | (163,031) |  |  | (188,729) |  |  | (129,337) |
Net premiums earned |  | 1,014,419 |  |  | 1,021,943 |  |  | 1,030,988 |
Losses incurred: |  |  |  |  |  |
Direct |  | 74,496 |  |  | 442,194 |  |  | 130,100 |
Assumed |  | (57) |  |  | 555 |  |  | (125) |
Ceded |  | (9,862) |  |  | (77,975) |  |  | (11,400) |
Net losses incurred |  | $ | 64,577 |  |  | $ | 364,774 |  |  | $ | 118,575 |
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 9.2 below provides additional detail regarding our QSR transactions in effect during 2021.
Reinsurance
Table | 9.2 |  |  |  |  |  |  |  |
Quota Share Contract |  | Policy Year | 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 (2) |  | 2017 | 30.0% |  | 60.0% |  | December 31, 2028
2018 QSR (2) |  | 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 (3) |  | 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) 2017 and 2018 QSR Transactions were terminated effective December 31, 2021. (3) Eligible credit union business written before April 1, 2020 was covered by our 2019 and prior QSR Transactions. We have executed an agreement with a group of unaffiliated reinsurers for a reinsurance transaction with an effective date of January 1, 2022 with a similar structure to our existing QSR transactions that will cover most of our NIW in 2022 (with an additional 15.0% quota share) and 2023 (with a 15% quota share). Generally, we will receive an annual profit commission provided the annual loss ratio on the loans covered under the transaction remain below 62.0%. 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. Early termination of the QSR agreements can also be elected by us for a fee, or under specified scenarios for no fee upon prior written notice. Table 9.3 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 as shown in table 9.2 to the percentage showed in 9.3.
Reinsurance
Table | 9.3 |  |  |  |  |  |
Quota Share Contract |  | Optional Termination Date (1) | Optional Quota Share % Reduction Date (2) |  | Quota Share % Reduction
2015 QSR |  | June 30, 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. (2) We can elect to reduce the quota share percentage beginning on this date, and bi-annually thereafter. Table 9.4 provides a summary of our QSR Transactions, excluding captive agreements, for 2021, 2020, and 2019.
Quota share reinsurance
Table | 9.4 |  |  |  |  |  |
|  | Years ended December 31,
(In thousands) |  | 2021 |  | 2020 |  | 2019
Ceded premiums written and earned, net of profit commission |  | $ | 118,537 |  |  | $ | 167,930 |  |  | $ | 111,550 |
Ceded losses incurred |  | 9,862 |  |  | 78,012 |  |  | 11,395 |
Ceding commissions (1) |  | 53,460 |  |  | 48,077 |  |  | 48,793 |
Profit commission |  | 153,759 |  |  | 72,452 |  |  | 139,179 |
(1)Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations. We incurred an early termination fee of $5 million for the termination of our 2017 and 2018 QSR Transactions effective December 31, 2021. The reinsurance recoverable on paid losses as of December 31, 2021 includes $36 million due from the reinsurers participating in the 2017 and 2018 QSR Transactions for loss and LAE reserves incurred at the time of termination. Ceded premiums written and earned, net of profit commission, increased in 2020 due to the decrease in profit commission. The decrease in profit commission was a result of higher ceded losses incurred, primarily due to an increase in the delinquency inventory due to the impacts of the COVID-19 pandemic. Under the terms of our QSR Transactions currently in effect, ceded premiums, ceding commissions, profit commission, and ceded loss paid and LAE paid 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 $66.9 million as of December 31, 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 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. An allowance for credit losses was not required for 2021. 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 special purpose 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 December 31, 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 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 transactions because the credit enhancement of the most senior tranche is less than the target credit enhancement. Table 9.5 provides a summary of our Home Re Transactions as of December 31, 2021, December 31, 2020 and December 31, 2019.
Excess of Loss Reinsurance |  |  |  |  |
Table 9.5 |  |  |  |  |
($ 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
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
2020 |  |  |  |  |
Remaining First Layer Retention | — | — | 275,283 | 184,514 | 166,005
Remaining Excess of Loss Reinsurance Coverage | — | — | 412,917 | 208,146 | 218,343
2019 |  |  |  |  |
Remaining First Layer Retention | — | — | — | 185,636 | 167,779
Remaining Excess of Loss Reinsurance Coverage | — | — | — | 271,021 | 260,957
(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. 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 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 Transactions 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 December 31, 2021 and December 31, 2020, were not material to our consolidated balance sheet, and the change in fair values during the years ended December 31, 2021, December 31, 2020 and December 31, 2019 were not material to our consolidated statements of operations. Total ceded premiums under the Home Re transaction were $44.5 million, $20.8 million, and $17.6 million for the years ended December 31, 2021, December 31, 2020 and December 31, 2019. 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 December 31, 2021, December 31, 2020 and December 31, 2019, 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 9.6 presents the total assets of the Home Re Entities as of December 31, 2021 , December 31, 2020 and December 31, 2019.
Home Re Entities total assets
Table | 9.6 |  |
(In thousands) |  |
Home Re Entity |  | Total VIE Assets
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 |
December 31, 2020 |  |
Home Re 2018-01 Ltd. |  | $ | 218,343 |
Home Re 2019-01 Ltd. |  | 208,146 |
Home Re 2020-01 Ltd. |  | 412,917 |
December 31, 2019 |  |
Home Re 2018-01 Ltd. |  | $ | 269,451 |
Home Re 2019-01 Ltd. |  | 283,150 |
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, all of which fluctuate over time. (see Note 1 - "Nature of Business" and Note 2 - "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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