MGIC Investment has been treading water for the past six months, recording a small return of 3.8% while holding steady at $25.72.
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Why Is MGIC Investment Not Exciting?
We're swiping left on MGIC Investment for now. Here are three reasons why MTG doesn't excite us and a stock we'd rather own.
1. Declining Net Premiums Earned Reflects Weakness
Our experience and research show the market cares primarily about an insurer’s net premiums earned growth as investment and fee income are considered more susceptible to market volatility and economic cycles.
MGIC Investment’s net premiums earned has declined by 1.1% annually over the last four years, much worse than the broader insurance industry.
2. Deteriorating Combined Ratio
Revenue growth is one major determinant of business quality, and the efficiency of operations is another. For insurance companies, we look at the combined ratio rather than the operating expenses and margins that define sectors such as consumer, tech, and industrials.
The combined ratio is:
- The costs of underwriting (salaries, commissions, overhead) + what an insurer pays out in claims, all divided by net premiums earned
If a company boasts a combined ratio under 100%, it is underwriting profitably. If above 100%, it is losing money on its core operations of selling insurance policies.
Over the last four years, MGIC Investment’s combined ratio has decreased by 40.1 percentage points, clocking in at 20.1% for the past 12 months. Said differently, the company’s expenses have grown at a slower rate than revenue, which is always a positive sign.
3. Recent EPS Growth Below Our Standards
While long-term earnings trends give us the big picture, we also track EPS over a shorter period because it can provide insight into an emerging theme or development for the business.
MGIC Investment’s weak 2.8% annual EPS growth over the last two years aligns with its revenue trend. This tells us it maintained its per-share profitability as it expanded.
Final Judgment
MGIC Investment isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 1.1× forward P/B (or $25.72 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're fairly confident there are better stocks to buy right now. We’d suggest looking at the most dominant software business in the world.
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