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Here's Why Hold Strategy is Appropriate for MGIC Investment

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MGIC Investment Corporation (MTG - Free Report) has been in investors’ good books on the back of premium growth, solid new insurance written and higher return on equity.

MGIC Investment’s return on equity was 15.9% in the trailing 12-month period, higher than the industry average of 8.3%. Return on equity is a profitability measure that identifies a company’s efficiency in utilizing its shareholders’ funds.

The stock has a VGM Score of A. VGM Score helps to identify stocks with the most attractive value, best growth and the most promising momentum.

The Zacks Consensus Estimate for 2021 earnings per share is pegged at $1.54, indicating increase of nearly 28.3% from the year-ago reported figure.

Now let’s see what makes the company an investor favorite.

MGIC Investment has been witnessing an increase in direct primary insurance in force (IIF), an important driver of future revenues. Its growth is driven by the company’s ability to generate New Insurance Written (NIW) and retain existing policies in force, as measured by persistency. In the first quarter of 2020, NIW grew 77.2% and IIF surged 88.2%. The company anticipates strong writing in 2020, banking on new business to be written and strong persistency.

The company continues to benefit on the back of net premium earned, which witnessed a CAGR of 3.6% in the past four years (2015-2019) on the back of higher average insurance in force and rise in premiums from single premium policy cancellations. This, in turn, has been driving revenues for quite some time, which have also seen a four-year CAGR of 3.9%. This momentum continued in first-quarter 2020 as well. New insurance written, higher premiums will continue to drive the revenues going forward.

Net investment income continues to be one of the important drivers of the company’s top-line and has been exhibiting improvement over the last several years. The metric witnessed four-year CAGR (2015-2019) of 12.6%. Despite the current low interest rate environment, higher average investment portfolio balance and higher average investment yields will continue to drive net investment income.

Further, the company’s debt level has remained stable over the past few years. Its cash and cash equivalents increased at a four-year CAGR (2015-2020) of 15.4%. This suggests that the company has sufficient cash reserves to meet its short-term debt obligations. Also, long-term debt to capital of 16.4% compares favorably with the industry’s measure of 30.3%.

Further, MGIC Investment’s times interest earned, a measure to identify the company ability to service debt, of 17.1 is good when compared with the industry’s average of 10.3, implying that its earnings are sufficient to cover interest obligations.

Notably, the company surpassed estimates in each of the trailing four quarters, the average positive earnings surprise being 13.42%.

However, shares of this Zacks Rank #3 (Hold) multi-line insurer have lost 44.1% year to date compared with the industry’s decline of 25.9%. Also, the company has been witnessing rising expenses due to higher losses incurred, underwriting and other expenses. Such costs tend to weigh on the company’s margins. Notably, in the first quarter, net margin contracted 90 basis points (bps) sequentially and 440 bps year over year.

Nonetheless, the consensus estimates for 2021 has moved up 5.5% in the past 60 days, reflecting analysts’ confidence in the stock.

Stocks to Consider

Some better-ranked stocks in the multi-line insurance industry include Old Republic International Corporation (ORI - Free Report) , Cigna Corporation (CI - Free Report) , and Horace Mann Educators Corporation (HMN - Free Report) . While Old Republic International sports a Zacks Rank #1 (Strong Buy), Cigna and Horace Mann carry a Zacks Rank #2 (Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

Old Republic engages in the insurance underwriting and related services business primarily in the United States and Canada. It surpassed estimates in each of the last four quarters, with the average positive surprise being 31.72%.

Cigna provides insurance and related products and services. It surpassed estimates in each of the last four quarters, with the average positive surprise being 6.92%.

Horace Mann Educators operates as a multiline insurance company in the United States. It underwrites and markets personal lines of property and casualty insurance. It surpassed estimates in two of the last four quarters, with the average positive surprise being 11.03%.

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