Reinsurance Program Will Enhance Financial Stability In Coming Years

Key Takeaways

• Proactive capital management strategies enhance earnings per share through share repurchases and dividends, while maintaining strong capital flexibility.
  
• Expanded reinsurance programs and operational efficiency initiatives enhance financial stability by mitigating risk exposure and lowering operating expenses.
  
• Elevated interest rates and potential GSE reform could increase delinquencies and impact MGIC's market share, profitability, and net margins.

Catalysts

Through its subsidiaries, provides private mortgage insurance, other mortgage credit risk management solutions, and ancillary services in the United States, the District of Columbia, Puerto Rico, and Guam.

• MGIC's expectation of maintaining high persistency rates due to elevated mortgage rates may contribute to stable premium yields and consistent revenue streams moving forward.
  
• The proactive capital management strategy, including share repurchases and dividends, could drive an increase in earnings per share, benefiting from lower outstanding shares and strong capital flexibility.
  
• Their expanded reinsurance program, especially covering new policies in 2025 and 2026, is likely to enhance financial stability and reduce volatility in earnings due to mitigated risk exposure.
  
• Continued expense management and operational efficiency initiatives aim to lower operating expenses in the future, potentially improving net margins by reducing cost structures.
  
• The resilience of the housing market, supported by favorable supply-demand dynamics and expected stable home pricing, could contribute to sustained new insurance volumes, impacting future revenue positively.

MGIC Investment Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MGIC Investment's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 63.2% today to 51.4% in 3 years time.
• Analysts expect earnings to reach $669.7 million (and earnings per share of $3.38) by about March 2028, down from $763.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.7x on those 2028 earnings, up from 7.4x today. This future PE is lower than the current PE for the US Diversified Financial industry at 15.4x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.18%, as per the Simply Wall St company report.

MGIC Investment Future Earnings Per Share Growth

Risks

• The impact of hurricanes Helene and Milton on new delinquency notices remains uncertain, which could increase future loss reserves and affect net margins.
  
• Higher debt-to-income ratios due to affordability issues might lead to increased risks and potential defaults, impacting revenue from insurance premiums.
  
• Elevated interest rates causing an increase in delinquency rates from more recent book years could lead to higher future claims, affecting net earnings.
  
• The possibility of future GSE reform or privatization may alter the competitive environment, potentially reducing MGIC's market share and thus its revenue.
  
• An increase in claims severity due to higher exposure on recent delinquencies could pressure profitability if not offset by adequate pricing adjustments, potentially reducing net margins.

Valuation

• The analysts have a consensus price target of $27.143 for MGIC Investment based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $25.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $669.7 million, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 7.2%.
• Given the current share price of $23.2, the analyst price target of $27.14 is 14.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.