Genworth MI Q2-2017: As good as it gets

Genworth MI reported their Q2-2017 results today and it was a blowout positive quarter.

The key statistic is that the reported loss ratio was down to 3% from 15% in the previous quarter – this is an accounting artifact due to the reduced reserving for losses (reserves increased $6 million compared to $30 million in paid claims). While the paid out claims is in-line with previous quarters, the difference is due to accounting for future losses – claims already in progress or claims processed have turned favourable from previous projections. The official explanation:

In the second quarter of 2017, losses on claims decreased significantly due to favourable development as there were fewer new reported delinquencies in Ontario, Alberta, Quebec and the Atlantic Provinces as compared to the incurred but not reported reserve as at March 31, 2017.

As a result, the company’s yearly guidance shifted from 25-35% loss ratio to 15-25%. Delinquent mortgages also slipped down from 2,082 to 1,809, a significant drop.

These two factors alone should be enough to boost the stock price 10% in tomorrow’s trading. Book value is about $41.34/share (which puts today’s closing price at 12% below book).

The only downside is that transactional insurance written is down 5% from the comparable quarter from last year. The portfolio insurance is down considerably but this was anticipated due to regulatory changes of the prior year. Accounting-wise, revenues recognized should continue to increase over the next few quarters as the amortization curve of the unearned premiums (previously written insurance) kicks into full swing.

Their portfolio is relatively unchanged by the increasing interest rate environment – their government and corporate debt portfolio is at a slightly decreased unrealized gain position ($100 million to $87 million), but their preferred share portfolio went from a $19 million unrealized loss to a $12 million realized gain position (which was a nice recovery from their initial investment).

One highlight which won’t get much press is that the company made a good chunk of change on unrealized gains on interest rate swaps from the last quarter. I’ve been tracking the CFO of Genworth MI, Philip Mayers, and the decisions Genworth MI has made on portfolio management has been very sharp.

The company’s reported minimum capital test ratio was 167% this quarter, and this is above their target rate of 160-165%, which means that the company may choose to engage in a share buyback or give out a special dividend if this condition persists – the upcoming quarter has a $0.44 dividend (unchanged) but the company is likely to increase this by 3-4 cents in the following quarter as they continue to build up excess capital.

All in all, this is probably the best quarter that Genworth MI has had in its history from an economic basis. Does it get better for them?

5 thoughts on “Genworth MI Q2-2017: As good as it gets”

  1. I know you’ve discussed the flaws with the short thesis in the past (i.e. severity of claims driven by price declines vs. number of claims driven by unemployment).

    Do you think that with so much of ON and BC GDP tied to housing, home price declines would lead to job losses and wage declines (starting with realtors and mortgage brokers, but leading to lower retail spending by homeowners that have underwater mortgages)? Is that a real (and significant) risk to MIC?

  2. @Jason: The short thesis will eventually be correct, but it will be a matter of timing. And to answer your question, yes. The 15% foreign transaction taxes have loopholes as wide as the Sun-Pluto orbit and I do not see any evidence as of yet that either the federal or provincial governments are doing anything serious beyond lip service to stem foreign capital from entering residential real estate. That, coupled with interest rates still being extremely accommodating, would suggest that the party continues.

  3. Agreed on loopholes and lipservice. Likely in the best interest of those in government today to keep the party going (likely negative for future governements).

    I do think China’s continued focus on capital controls will be making a difference soon (esp. as of July 1st). Detached pricing in Toronto and Van above $2mil has already slowed down. Could also be slightly impacted by higher CAD recently.

    Do you think if OSFI actually tightens lending this fall, there will be an impact on prices or is that also overblown in media? Thanks.

  4. Just recall that these $2 million homes selling in Vancouver are not subject to mortgage insurance (and they are likely cash purchases anyhow!).

    OSFI’s tightening rules will likely push more people into the non-insured mortgage space, which would cause a stealth increase in mortgage rates (by virtue of financing requirements) but I think the bigger issue is if the concept of lender “risk sharing” goes ahead.

  5. A bit surprised at the price movement over the past couple days. Pretty obvious there’s a large degree of profit-taking.

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