MTG Financial Analysis

Analysis Date: 2/5/2025

Business Model

MGIC Investment Corporation generates revenue primarily through mortgage insurance premiums. They offer insurance to lenders to cover losses on residential mortgage loans in case of borrower default. Premiums are earned over the life of the insurance policy, with different premium plan options including monthly, annual, and single premiums.

Revenue Sources

• Net Premiums Earned: This is the primary revenue source, representing premiums earned from mortgage insurance policies in force.
• Net Investment Income: Revenue generated from the investment portfolio.
• Other Revenue: Includes ancillary revenues, which are not specified in detail in the provided documents but are a minor component.

Income Statement Analysis

• Net premiums earned increased by 6.55% year-over-year, indicating growth in the insurance business.
• Net investment income also increased by 6.10% year-over-year, contributing positively to revenue growth.
• Underwriting and other expenses decreased by 10.24% year-over-year, demonstrating improved operational efficiency.
• Losses incurred, net shifted from negative to positive, which could be a concern and requires further investigation. However, the absolute value is still small compared to revenue.

Balance Sheet Analysis

• Investments increased slightly, indicating continued investment activities.
• Cash and cash equivalents decreased significantly by 37.44%, potentially due to capital return activities like share repurchases and dividends.
• Loss reserves and Unearned premiums decreased, which could be a positive sign reflecting improved credit quality or changes in policy terms, but needs to be correlated with delinquency trends.
• Shareholders' equity increased by 1.98%, driven by net income and potentially offset by capital distributions.
• Total liabilities decreased by 6.24%, contributing to a stronger balance sheet.

Capital Allocation

MGIC Investment Corporation is actively returning capital to shareholders. In Q4 2024, they paid common stock dividends of $33 million and repurchased 7.8 million shares for $193.3 million. For the full year 2024, approximately $700 million was returned to shareholders, representing a 92% payout ratio of net income. Share repurchases are expected to remain the primary means of capital return, supplemented by quarterly dividends. MGIC paid a $400 million dividend from MGIC (operating company) to the holding company, indicating strong capital generation at the operating level. Business reinvestment is evident in maintaining and growing the insurance in force, although specific R&D or capital expenditure details are not provided in these documents.

Management Commentary

We ended the year on a high note with solid Q4 financial results capping another successful year. We consistently generated mid teen returns on equity while returning meaningful capital to our shareholders.

Our business strategies and the strength of our business model allows us to be successful in varying economic environments.

Consistent with the last few years, our 2024 financial results benefited from favorable credit trends and a disciplined approach to risk and capital management.

While we prioritize prudent growth over capital return, opportunities for growing our insurance in force over the last 2 years has been constrained due to the size of the market.

It is still too early to determine the full impact of hurricanes Helene and Milton will have on our new notices and our delinquency rate.

While the level of new notices and our delinquency rate have increased relative to recent years, they remain low by historical standards.

For 2025, we expect operating expenses will be lower again to a range of $195,000,000 to $205,000,000

We continued our share repurchase program into 2025. And in January, we repurchased an additional 3,500,000 shares of common stock for a total of $85,000,000

Overall Sentiment: Positive. Management expresses confidence in the company's performance, business model, and future prospects. They highlight strong financial results, capital return, and operational efficiency. While acknowledging external uncertainties like housing market conditions and GSE reforms, the overall tone is optimistic about MGIC's ability to navigate the environment and deliver value.

Recommendation

Rating: Buy

Reason for Rating: Based on the analysis, a 'Buy' recommendation is suggested. MGIC demonstrates strong financial performance with revenue and net income growth, improved operational efficiency by reducing expenses, and a robust capital return program. The balance sheet remains healthy, and management commentary is positive. While there are risks inherent in the mortgage insurance industry and external economic factors, MGIC appears well-positioned to continue its strong performance.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/5/2025, 7:48:09 AM