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Reinsurance
 12 Months Ended
Dec. 31, 2022
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 had 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)202220212020
Premiums earned:
Direct$1,154,728 $1,167,592 $1,199,824 
Assumed8,778 9,858 10,848 
Ceded - quota share reinsurance (1)
(86,435)(118,537)(167,930)
Ceded - excess-of-loss reinsurance(69,938)(44,494)(20,799)
Total ceded(156,373)(163,031)(188,729)
Net premiums earned$1,007,133 $1,014,419 $1,021,943 
Losses incurred:
Direct$(274,072)$74,496 $442,194 
Assumed(330)(57)555 
Ceded - quota share reinsurance19,837 (9,862)(77,975)
Losses incurred, net$(254,565)$64,577 $364,774 
Other Reinsurance Impacts:
Profit commission on quota share reinsurance (1)
$176,084 $153,759 $72,425 
Ceding commission on quota share reinsurance52,071 53,460 48,077 
(1)Ceded premiums earned are shown 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 9.2 below provides additional detail regarding our QSR transactions in effect during 2022.

Reinsurance
Table9.2
Quota Share ContractCovered Policy YearsQuota Share %
Annual Loss Ratio to Exhaust Profit Commission (1)
Contractual Termination Date
2015 QSR (2)
Prior to 201715.0 %68.0 %December 31, 2031
2019 QSR (2)
201930.0 %62.0 %December 31, 2030
2020 QSR202012.5 %62.0 %December 31, 2031
2020 QSR and 2021 QSR202017.5 %62.0 %December 31, 2032
2020 QSR and 2021 QSR202117.5 %61.9 %December 31, 2032
2021 QSR and 2022 QSR202112.5 %57.5 %December 31, 2032
2021 QSR and 2022 QSR202215.0 %57.5 %December 31, 2033
2022 QSR and 2023 QSR202215.0 %62.0 %December 31, 2033
2022 QSR and 2023 QSR202315.0 %62.0 %December 31, 2034
Credit Union QSR (3)
2020-202565.0 %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)2015 and 2019 QSR Transactions were terminated effective December 31, 2022.
(3)Eligible credit union business written before April 1, 2020 was covered by our 2019 and prior QSR Transactions.

We have agreed to terms with a group of unaffiliated reinsurers for a reinsurance transaction with an effective date of January 1, 2023 with a similar structure to our existing QSR transactions that will cover most of our NIW in 2023 (with an additional 10.0% quota share). Generally, we will receive an annual profit commission provided the annual loss ratio on the loans covered under the transaction remain below 58.5%.

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 ContractCovered Policy Years
Optional Termination Date (1)
Optional Quota Share % Reduction Date (2)
Optional Reduced Quota Share %
2020 QSR2020June 30, 2023January 1, 202310.5% or 8%
2020 QSR and 2021 QSR2020June 30, 2023January 1, 202314.5% or 12%
2020 QSR and 2021 QSR2021December 31, 2023January 1, 202314.5% or 12%
2021 QSR and 2022 QSR2021December 31, 2023January 1, 202310.5% or 8%
2021 QSR and 2022 QSR2022December 31, 2024July 1, 202312.5% or 10%
2022 QSR and 2023 QSR2022December 31, 2024July 1, 202312.5% or 10%
2022 QSR and 2023 QSR2023December 31, 2025July 1, 202412.5% 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.

We incurred an early termination fee of $2.2 million for the termination of our 2019 QSR Transaction effective December 31, 2022 and $5.0 million for the termination of our 2017 and 2018 QSR Transactions effective December 31, 2021. We also terminated our 2015 QSR Transaction effective December 31, 2022. The reinsurance recoverable on paid losses due from reinsurers for loss and LAE reserves incurred at the time of termination includes $17.7 million as of December 31, 2022 from reinsurers participating in the 2015 and 2019 QSR Transactions and included $36.0 million as of December 31, 2021 due from reinsurers participating in the 2017 and 2018 QSR Transactions.

Ceded premiums written and earned, net of profit commission, decreased in 2022 due to the increase in profit commission. The increase in profit commission was a result of ceded losses incurred. Ceded losses incurred for the year ended December 31, 2022 primarily reflect favorable loss reserve development. See Note 8 - “Loss Reserves” for discussion of our loss reserves.
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 $28.2 million as of December 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. An allowance for credit losses was not required for 2022 or 2021.
EXCESS OF LOSS REINSURANCE
We have Excess-of-loss transactions (“XOL Transactions”) with a panel of unaffiliated reinsurers executed through the traditional reinsurance market (“Traditional XOL Transaction”) and with unaffiliated special purpose insurers (“Home Re Transactions”).

The 2022 Traditional XOL Transaction provides reinsurance coverage on eligible NIW in 2022. 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.

We can elect to terminate our Traditional XOL Transaction 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 Transaction are based off the remaining reinsurance coverage levels. The reinsured coverage levels are secured by funds on deposit from 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.

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 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, as defined in the related insurance-linked notes transaction agreements, 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, 2022, a "Trigger Event" has occurred on our Home Re 2019-1 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 2022-1 transaction because the credit enhancement of the most senior tranche is less than the target credit enhancement.
Table 9.4a and 9.4b provides a summary of our XOL Transactions as of December 31, 2022, December 31, 2021 and December 31, 2020.

Excess of Loss Reinsurance
9.4a
($ in thousands)Issue DatePolicy In force DatesOptional Call/ Termination Date (1)Legal MaturityInitial First Layer RetentionInitial Excess of Loss Reinsurance Coverage
Home Re 2022-1, Ltd.April 26, 2022May 29, 2021 - December 31, 2021April 25, 202812.5 years$325,589$473,575
Home Re 2021-2, Ltd.August 3, 2021January 1, 2021 - May 28, 2021July 25, 202812.5 years190,159398,429
Home Re 2021-1, Ltd.February 2, 2021August 1, 2020 - December 31, 2020January 25, 202812.5 years211,159398,848
Home Re 2020-1, Ltd.October 29, 2020January 1, 2020 - July 31, 2020October 25, 202710 years275,283412,917
Home Re 2019-1, Ltd.May 25, 2019January 1, 2018 - March 31, 2019May 25, 202610 years185,730315,739
Home Re 2018-1, Ltd.October 30, 2018July 1, 2016 - December 31, 2017October 25, 202510 years168,691318,636
2022 Traditional XOLApril 1, 2022January 1, 2022 - December 30, 2022January 1, 203010 years82,523142,642
(1)We have the right to terminate the Home Re Transactions under certain circumstances and on any payment date on or after the respective Optional Call date. We can elect early termination of the Traditional XOL Transaction beginning on this date, and quarterly thereafter.
9.4bRemaining First Layer RetentionRemaining Excess of Loss Reinsurance Coverage
($ in thousands)
December 31, 2022
December 31, 2021
December 31, 2020
December 31, 2022
December 31, 2021
December 31, 2020
Home Re 2022-1, Ltd.$325,576 $— $— $473,575 $— $— 
Home Re 2021-2, Ltd.190,097 190,159 — 352,084 398,429 — 
Home Re 2021-1, Ltd.211,102 211,142 — 277,053 387,830 — 
Home Re 2020-1, Ltd.274,871 275,204 275,283 113,247 234,312 412,917 
Home Re 2019-1, Ltd.183,540 183,917 184,514 208,146 208,146 208,146 
Home Re 2018-1, Ltd.164,849 165,365 166,005 140,993 218,343 218,343 
2022 Traditional XOL82,517 — — 142,642 — — 
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 and Home Re 2022-1 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, 2022 and December 31, 2021, were not material to our consolidated balance sheet, and the change in fair values during the years ended December 31, 2022, December 31, 2021 and December 31, 2020 were not material to our consolidated statements of operations. (see Note 5 - "Investments" and Note 6 - "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 December 31, 2022, December 31, 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 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 9.5 presents the total assets of the Home Re Entities as of December 31, 2022 , December 31, 2021 and December 31, 2020.
Home Re Entities total assets
Table9.5
(In thousands)
Home Re Entity Total VIE Assets
December 31, 2022
Home Re 2018-1 Ltd.$146,822 
Home Re 2019-1 Ltd.208,146 
Home Re 2020-1 Ltd.119,159 
Home Re 2021-1 Ltd.285,039 
Home Re 2021-2 Ltd.357,340 
Home Re 2022-1 Ltd.473,575 
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 2018-1 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 (1) 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, (2) 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 (3) 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 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" ).