Swiss Re Insurance-Linked Fund Management

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MGIC restructures quota share, but mortgage ILS help on PMIERs


Mortgage risk insurer MGIC has revealed that the removal of maximum coverage levels in certain states resulted in the partial termination and restructuring of its 2015 quota share reinsurance arrangement with an affiliate, which subsequently impacted its Q2 results.

Mortgage riskIn the second-quarter of 2019, MGIC’s ceded premiums written and earned increased from $21.4 million in Q2 2018 to $36.5 million.

The firm states that this was a result of a one-off $6.8 million termination fee related to its 2015 quota share reinsurance transaction, as well as premiums ceded under its mortgage ILS deals, and a lower profit commission as a result of higher ceded losses.

Managing the Private Mortgage Insurer Eligibility Requirements (PMIERs) has become increasingly important and given their relatively recent introduction mortgage insurers are adjusting their capital to this and as a result there has been an increasing need for insurers to utilise reinsurance as part of their capital management toolkit.

During the second-quarter, the mortgage insurer’s PMIERs available assets reached $4.4 billion, which MGIC says is $1.1 billion in excess of its Minimum Required Assets under the PMIERs financial requirements.

Speaking during the firm’s Q2 earnings call, Chief Financial Officer (CFO), Tom Mattke explained that the increase in PMIERs excess was a result of its recent ILS transaction, although this benefit was somewhat offset by the quota share restructure and transfer of risk from a reinsurance affiliate back to MGIC.

Discussing the termination of a portion of the 2015 quota share reinsurance agreement, Mattke said: “The original reason that the business was reinsured by the affiliate was due to the fact that certain states limited the level of coverage that a primary writer could cover. After working with various state regulators, we were able to have that requirement removed.

“The transfer of risk was done to reduce administrative burden and really does not change the risk profile of our company. Regarding the appropriate level of excess available under PMIERs, it is difficult to actually manage to a specific target given the regulatory requirements for paying dividends.”

As shown by the Artemis Deal Directory, MGIC has issued two mortgage ILS deals, a $318.6 million Home Re 2018-1 transaction and the more recent and slightly smaller $315.74 million, Home Re 2019-1 deal.

Mortgage risk is becoming a more common feature of the ILS space, providing capital markets investors with access to a portfolio of mortgage insurance risks, while providing the sponsor with a source of fully-collateralised excess-of-loss reinsurance protection.

MGIC said in its Q2 earnings release that it expects it may enter into other insurance linked note (Home Re transactions) transactions if capital markets conditions remain favourable, and this stance was reiterated by the company’s Chief Executive Officer (CEO), Pat Sinks, during the Q2 earnings call.

“I believe that our company is well positioned to acquire, manage and distribute mortgage credit risk in a variety of forms supported by a robust capital structure that includes our strong balance sheet, and where appropriate, reinsurance treaties and the capital markets.”

Details on every mortgage ILS transaction can be found here in our Deal Directory.

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