This is part of my continued coverage of Genworth MI (TSX: MIC). There wasn’t anything too remarkable about Q2-2015’s report other than that delinquencies in Alberta have not been materially increasing. Combined ratio is at 37% for the quarter, which is in-line, and the company wrote $205 million in premiums, which is significantly higher than the $160 million from the previous year’s quarter. As the premiums recognized is significantly less than this number ($144 million) as policies amortize, the revenues to be recognized will be increasing over time.
The conference call transcript would suggest that management is quite aware of the economic fallout with regards to oil prices and Alberta’s economy and also the mortgage fraud issues that Home Capital Group (TSX: HCG) disclosed.
Portfolio management moved out of common shares and into preferred shares – from the beginning of the year they moved about $190 million of capital into preferred shares in the financial and energy sectors. Considering all the carnage going on in that sector (please read James Hymas for his most brilliant descriptions of the Canadian preferred share market) this is probably a reasonable decision on valuation.
The company repurchased 1.54 million shares at $34.38/share during the quarter. Considering this is below their book value, share buybacks are an accretive transaction. The company’s ability to conduct share buybacks relies upon them being “modestly” above a 220% minimum capital test ratio (which was at 231% at the end of Q2).
With MIC.TO shares trading at $29 as of last Friday, any further share repurchases at this price range (in my humblest of opinions) would be a highly beneficial transaction for remaining shareholders and the company should be exercising another share buyback this quarter – basically at current prices every dollar they spend on a buyback is minting about 25 cents of value from thin air.
The market price is clearly trading on fears of some sort of downturn in the Canadian real estate market. With the carnage going on in China there may be some foreign liquidation of domestic land, but how much collateral damage this may cause in the broader market remains to be seen. Employment rates are the primary determinant of the ability for people to be servicing their mortgages and right now this is appearing to hold steady at 6.8%. Although the horizon appears to be stormy, there seems to be a reasonable economic buffer between the fundamental valuation of Genworth MI and the risks ahead concerning the mortgage insurance market. Cash generation is still immensely huge and combined ratios are incredibly low.
I have always likened Genworth MI to be a glorified bond fund with a housing-linked component that will boost returns providing the Canadian economy doesn’t implode (i.e. default rates will rise) beyond the 2008-2009 economic crisis levels. The current trading price is on the lower depths of my fair value range and I am eyeing it closely.
Is there a blackout period post-earnings? No buybacks have been executed since earnings even though it has been below book value for the whole time.
I think the blackout period expires two or three business days after the quarterly earnings, so they’re well within the window of opportunity to repurchase. One also has to look at what’s going on at the 57% shareholder (Genworth Financial) which isn’t exactly doing great over the past year, having evaporated more than half of their market value. Obviously it is in Genworth’s best interest to effect a buyback at a high a price as possible, one of the conflicts of interest of owning this controlled corporation.