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Equity Research Report - December 11th 2013

MGIC Investment Corp. (NYSE:MTG) Summary Data
52 week Range One-Year Return Market Capitalization P/E Div/yield EPS Shares Beta Institutional Ownership Growth Rate(2013 three months ended September 30 v.s. 2012 three months ended September 30) Total Revenue Net Income Diluated Earnings Per Share -16.9% 104.9% 132.8% 1.92 - 8.59 318% 2.81B -2.16 337.76M 3.46 89%

Consensus Recommendation1
Outperform End Month -0.04 December 8 Dec 2013

1-5 Linear Scale (1) BUY (2) OUTPERFORM (3) HOLD (4) UNDERPERFORM (5) SELL No Opinion Mean Rating Current 1 4 4 1 0 0 2.5 1 Month Ago 1 3 4 1 0 0 2.56 2 Month Ago 3 Month Ago 1 2 5 1 0 0 2.67 1 2 4 1 0 0 2.62


Equity Research Report - December 11th 2013

Company Overview:
MGIC Investment Corporation is a holding company and through wholly owned subsidiaries is a private mortgage insurer in the United States. MGIC Investment Corporation has two subsidiaries

Mortgage Guaranty Insurance Corporation (MGIC) MGIC is the principal subsidiary of MGIC Investment Corporation, and which is the nation's largest private mortgage insurer. As of September 30, 2013, it has $159.2 billion primary insurance in force covering approximately 1.0 million mortgages. MGIC serves lenders throughout the United States, Puerto Rico, and other locations helping families achieve homeownership sooner by making affordable low-down-payment mortgages a reality.2 MGIC Investor Services Corporation (MISC) MISC provides market-leading mortgage credit and prepayment risk analytics to lenders including due diligence services, portfolio analysis, originator/wholesaler matchmaking, and servicing rights brokering.3

MGIC in turn has two its own subsidiaries:

MGIC Indemnity Corporation (MIC) In 2012, MGIC’s risk-to-capital ratio exceeds the regulatory limit, and is prevented from writing new business. MIC is then used by MGIC to write new business under conditional approval from Office of the Commissioner of Insurance of the State of Wisconsin(OCI) and Fannie Mae and Freddie Mac (the "GSEs"). The OCI and GSE approvals of MIC will expire at the end of 2013. MGIC Australia Pty Limited MGIC Australia Pty Limited was established to write mortgage insurance in the Australian residential mortgage market.

 Housing market is picking up. This is demonstrated by the following facts: o Housing price is increasing4

S&P/Case-Shiller U.S. National Home Price Index



3.16% 11.18%

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According to MGIC Investment Corporation Reports Third Quarter 2013 Results According to MGIC’s official website: 4 According to

Equity Research Report - December 11th 2013


Housing vacancy rate is declining5
Rental Vacancy Rates First Quarter Second Quarter 8.2 8.6 Third Quarter 8.3 8.6 Fourth Quarter 8.7 Homeowner Vacancy Rates First Quarter 2.1 2.2 Second Quarter 1.9 2.1 Third Quarter 1.9 1.9 Fourth Quarter 1.9


2013...…………..……. 8.6 2012...…………..……. 8.8


New house sold and for sell is increasing6
Percent Change: October 2013 from October 2012 United States 21.6%


New housing construction is increasing New Privately-Owned Housing Units Percent Change(United States): Authorized in Permit-Issuing Places October 2013 from October 2012 13.9%

Delinquency rate on mortgage is declining8 According to TransUnion, the percentage of mortgage holders at least two months behind on their payments fell in the July-September quarter from 5.33% a year earlier to 4.09%, a five-year low. Us Unemployment rate is declining9

5 6

US Census Bureau US Census Bureau 7 US Census Bureau 8 9 US Census Bureau

Equity Research Report - December 11th 2013
 MGIC has better capital structure than before MGIC’s risk-to-capital ratio now meets all the jurisdiction’s requirement, and so now it is eligible to write business in all the jurisdiction.

 Company Specific According to the company’s latest quarterly release, the unexpected regulatory changes, potential dispute with regulatory authorities and change of lenders and borrowers preferences to mortgage insurance could negatively affect the business. Furthermore, there is no guarantee when they can return to annual profitability. Economy Outlook: Interest Rate As the job market is picking up, it is widely expected that the Federal Reserve will be pulling back its bond buying program early next year, which will put pressure on the interest rate to go up. This will potentially has a negative effect on housing market and on housing owner’s ability to pay their mortgages.

After years of losses, MGIC Investment Corp. posts second quarterly gain- Oct 16,2013 Mortgage insurer MGIC Investment Corp. posted a surprise profit for the second consecutive quarter as improvements in the economy and housing market led to lower mortgage delinquencies and claims. The Milwaukee-based company said Wednesday it had net income of $12.1 million, or 4 cents a share, compared with a loss of $246.9 million, or $1.22, in the year-ago quarter. Wall Street analysts had expected a loss of 13 cents per share for MGIC's third quarter. In the second quarter of this year, MGIC also had a profit of 4 cents a share, while analysts had anticipated a loss of 15 cents a share. That was MGIC's first quarterly profit in three years.

 Using Price/Sales Ratio11 MTG 12-month Price/Sales ratio(ended at December 31st) is estimated to be 2.9, compared to an industry average of 1.13.12 Its stock price looks stretched on the Price/Sales basis. The price is calculated to be $3.19 if we use the industry average ratio.

10 11 MTG’s revenue for the first three quarter is based on company ’s quarterly release, the revenue for the fourth quarter is estimated. 12 According to, Property & Casualty Insurance Industry

Equity Research Report - December 11th 2013
 Using dividend discount model o Using CAPM Model to calculate required rate of return The company has a beta equals to 3.46, the trailing 10-year S&P average annual return is 5.22%, the current 10-year T-Bond Rate is 2.86%. ( ) ( ) The annual dividend from MTG before August 2008 is around 10 cents, if we use this number as the estimated annual dividend in the future, and if we assumed the future growth rate of MTG’s earnings per share is 10% (the five-year trailing growth rate is 14.39%), the stock price = o 9.71. Using 10-year T-Bond Rate as discount rate Again, assuming the annual dividend is 10 cents, the stock price is calculated to be  In summary, MTG’s price is calculated to be around $10 if earnings are expected to be growing at a rate comparable to the last few years in the foreseeable future. Otherwise, it seems MTG’s stock is overpriced. Considered the current housing market trend and macro-economic factors, we think it is reasonable to price MTG’s stock at around $10.