Current PE: 9.3
Current Market Cap: $5.7B
Current Price/ Book: 1.33
History of MGIC Investment Corporation:
In the late 1950s, the national population was growing with the Baby Boom, and everyone expected to have a chicken in every pot and a car in every garage. But before the garage and the car came a home. The average cost of a home at that time was $20,000 and average yearly income was $4,545. Putting the required 20% down payment on a home was difficult.
In 1957, Max Karl, a real estate attorney in Milwaukee, Wisconsin, observed the struggles that people had with saving for a down payment on a home. He also understood the risks that mortgage originators faced in lending the money to potential home buyers. He was frustrated with the process of closing loans with 100% government guarantees, which he believed was rife with red tape and bureaucracy. Why not create a private company that insured only the top portion of a mortgage, rather than 100% of the mortgage? This could be a less costly and easier way to provide low-down payment financing to borrowers with less than a 20% down payment.
Mr. Karl took his idea to a group of investors, many of whom were Savings & Loan executives. This group, along with his family and friends (even his barber!) contributed $250,000 in capital, and he founded the Mortgage Guaranty Insurance Corporation or MGIC.
Today, as average home prices rise across the country, saving for a down payment is still difficult. But nearly 50 years since MGIC was founded, we’re still here, working with mortgage lenders and helping people afford homes with low down payment loans. [Obtained from MGIC Investment Corp's website]
What I like about MTG:
- Superior Net Margin. Improving margin over last 2 years.
Year Net Profit Margin (%)
- Good ROE and ROA. Improving ROE and ROA over last 3 years.
Year ROE ROA
12/05 15.0 9.8
12/04 13.4 8.7
12/03 13.0 8.3
12/02 18.5 11.9
12/01 21.2 14.0
12/00 22.0 14.0
12/99 26.5 15.1
12/98 23.5 12.6
12/97 21.8 12.4
12/96 18.9 11.6
- Book value/ Share compounds at 15.4% over the last 5 years; and 11.8% over the last 3 years; and 9.9% over last year.
Year Book Value/ Share
- Current Price/ Book Value = 1.33. This is the 2nd lowest price/ book value in the last 10 years.
Year Price/ Book
- Improving persistency (percentage of insurance remaining in force from one year prior).
Year Persistency (%)
- Significant shares repurchase. Outstanding shares are reduced by 23% over last 9 years.
Year Shares Outstanding
12/05 90.7 Mil
12/04 96.3 Mil
12/03 98.4 Mil
12/02 100.3 Mil
12/01 106.1 Mil
12/00 106.8 Mil
12/99 105.8 Mil
12/98 109.0 Mil
12/97 106.5 Mil
12/96 117.9 Mil
- The most efficient PMI Company with the lowest expense ratio.
- MGIC has one of the largest market shares in the very concentrated private mortgage insurance industry--consistently 20%-25%.
- MGIC has the oldest and most detailed mortgage-history database, which adds a considerable advantage in underwriting skill.
- Compounding housing prices support ongoing premium revenue increases. U.S. house prices haven't fallen nationally since 1952, although there have been several temporary regional declines.
- Collectively, directors and officers own about 1.85% of MGIC.
- Holdings of superinvestors: Bill Miller (Legg Mason Value Fund; 2.34% of assets); Bill Nygren (Oakmark I Fund; 1.71% of assets).
What I dislike about MTG:
- MGIC's moat is shrinking as lenders flex their increasingly powerful muscles to recapture part of MGIC's premiums.
- Unlike mortgage interest, private mortgage insurance isn't tax-deductible. This makes competing products like 80-10-10 (80% first mortgage, 10% second mortgage, and 10% down payment) loans more attractive.
- Alternatives to private mortgage insurance include:
- lenders structuring mortgage originations to avoid private mortgage insurance, such as a first mortgage with an 80% loan-to-value ratio and a second mortgage with a 10%, 15% or 20% loan-to-value ratio (referred to as 80-10-10, 80-15-5 or 80-20 loans, respectively) rather than a first mortgage with a 90%, 95% or 100% loan-to-value ratio,
- investors holding mortgages in portfolio and self-insuring,
- investors using credit enhancements other than private mortgage insurance or using other credit enhancements in conjunction with reduced levels of private mortgage insurance coverage, and
- lenders using government mortgage insurance programs, including those of the Federal Housing Administration and the Veterans Administration.
- Government-sponsored entities (GSEs) Fannie Mae FNM and Freddie Mac FRE control more than 40% of the mortgage market, which lets them dictate terms to mortgage insurers.
- GSEs need more capital to back loans insured by AA-rated insurers like MGIC than loans insured by AAA-insurers like United Guaranty Corporation AIG. This permanently disadvantages MGIC.
- Increasing default rate, year after year.
Year Percentage of default (%)
- Significant insiders selling. CEO (Culver Curt) sold shares worth $2.4M on Feb3, 2006.
Feel free to email me if you have any comments, thoughts, criticisms, etc....
All the best,
Dah Hui Lau (David)