Tag: MIC

Genworth MI Q3-2019: Steady as she goes

I’m catching up on quarterly reports, so these posts are coming in a little late. This will be a short one.

Genworth MI (TSX: MIC) reported their third quarter results. They are largely unsurprising and they continue to be a cash machine as there have been no material issues concerning the Canadian housing market (as it relates to the mortgage-insurable side of the business – the high end market in Vancouver, BC is getting slammed because the provincial government is massively increasing the cost of carry for $3 million+ assessed value properties). Loss ratio is 18%, expense ratio is 20%, and they continue to take in a ton of cash simply because mortgage delinquencies and defaults are incredibly low.

As a result in this year, they’ve declared special dividends of $1.85/share so far and also have spent some capital on share buybacks – although since their currently share price is above book, management opts for the special dividend route.

There are only two issues that I will note.

One is that there is a brief mention of the impact of transition away from Genworth Financial’s shared services – since MIC’s majority stake (56.9%) is being bought out by Brookfield Business Partners, MIC will have to build its own services currently being purchased from Genworth, and this will cost money. It is also not entirely known about the exact impact of this, whether Brookfield intends on using Genworth MI as a currently existing cash machine, or whether they have strategic plans for the entity. The common shares are also at $53, which is significantly above the book value of $46 (which historically has been a rare situation) and it is almost as if the market will expect a follow-on bid to take the rest of the 43% out of the market. We will see.

The other note is that the company’s portfolio of preferred shares has also been a victim of the 5-year rate reset plague which has depressed prices of such preferred shares – they are now sitting on a $107 million unrealized loss on their current fair value of $494 million – or 18%.

Otherwise, the company seems to be doing very well. There does not appear to be any hints that CMHC wishes to apply any semblance of pricing pressure in the marketplace, which would be the biggest risk to MIC’s share price. One would have presumed that the Government of Canada would want to make life more affordable for the middle class homebuyer, but I am the first one to know that the words coming out of politicians’ mouths should always be verified by the actions of the bureaucracy underneath them!

Genworth MI – sold to Brookfield Business Partners

The winner of the Genworth MI auction (presumably there were multiple interested partners) was Brookfield Business Partners LP (TSX: BBU.UN) at CAD$48.86 per share, for 57% of Genworth MI shares. Brookfield Asset Management owns about 80% of Brookfield Business Partners. I’m not going to dissect more of Brookfield’s capital structure or even the LP unit, but suffice to say, they have the assets to consummate the transaction, assuming they receive regulatory approval.

The transaction, if approved, will close sometime in the first half of 2020 and apparently will receive regulatory approval by the end of 2019. I had speculated earlier that Genworth would not receive more than CAD$55/share for the unit (and my initial opinion was CAD$50) and this appears to be right on the mark. Genworth MI’s stated book value was $47.17 at the end of Q2-2019, so Brookfield is paying a very modest premium over book.

Here’s the interest part of the release:

Brookfield Business Partners has also agreed, between now and the closing of the transaction, to provide Genworth Financial, Inc. with a bridge loan of up to US$850 million that is intended to be repaid from proceeds of the sale of its interest in Genworth Canada.

Genworth Financial has some solvency matters to deal with.

The other logistical matter for Genworth MI is that they share services with Genworth Financial for some business operations. This will have to be carved out and transitioned over with the takeover. In addition, it is not clear whether the senior staff of Genworth MI will go back to Genworth Financial, or whether they will stay with the MI subsidiary. When businesses are acquired like this, there is always an element of disruption, if not handled carefully!

As for the other 43% of Genworth MI, currently Brookfield indicated they do not wish to repurchase it:

Given the short time frame available to complete this transaction, Brookfield Business Partners has no current intention to make an offer for the balance of the outstanding Shares. Brookfield Business Partners may in the future consider the appropriateness of such an offer after discussion with Genworth Canada’s shareholders and other stakeholders.

This may happen if Genworth MI starts to trade significantly under CAD$48.86. One needs to look no further than the treatment of minority shareholders of Teekay Offshore (NYSE: TOO) which are currently receiving a lowball offer for their shares.

I would suspect very limited upside for the capital value of Genworth MI shares at current market prices.

Genworth MI Q2-2019 – surprisingly good quarter

Genworth MI (TSX: MIC) yesterday announced their quarterly results. If there was one figure in the report that was surprising, it was the following:

I do not think many people would have expected year/year quarterly growth in transactional premiums growing. This is a fairly strong result, and would suggest that Q3-2019’s number will also be up around 10-12%. In the MD&A, it is cited that it is “primarily due to a modestly larger transactional mortgage originations market”.

With a combined ratio (loss ratio plus expense ratio) of 35%, Genworth MI makes 65% pre-tax margins on their written premiums – assuming that residential real estate market conditions don’t change.

With interest rates now being held low by central banks, this is a reasonable proposition.

The number of delinquencies also remains relatively steady, down to 1,701 from 1,760’s previous quarter – which is white noise given the 2.17 million units of real estate they have on the insurance books.

For Genworth MI, the good news has gotten even better. I thought this would be a story of ‘steady as she goes’, but things are surprisingly good. This probably is the reason why the stock is up some 7% at present.

However, all of this is overshadowed by parent Genworth Financial (NYSE: GNW) which is now actively trying to unload their 57% stake in the Genworth MI subsidiary. My original post speculated that they’d not get more than $50 from a transaction, but given today, I’ll shade this higher to around $55/share.

Genworth MIC potentially on the selling block

Genworth Financial (NYSE: GNW) owns 57% of Genworth MI (TSX: MIC). GNW has also been subject to a merger agreement with a China-state owned entity, China Oceanwide, which proposed acquiring GNW for US$5.43/share. One of the conditions is the approval of the various regulatory authorities. The key stumbling block appears to be the Canadian regulator, and as a result, GNW is proposing to explore selling the MIC entity.

There are two questions. One is who would purchase MIC, and the second is the valuation. Surely the acquirer would have to be a Canadian entity – my guess is that the CPPIB or provincial pension arms would be ripe candidates (which would ensure that substantially all of the Canadian mortgage insurance market is held by crown corporations). There are not a lot of insurers that would have the capacity to take on MIC – obvious candidates include MFC, SLF, GWO, FFH or IFC.

The market is up about 4% for MIC presently. There’s a pretty good case to be made that the transaction, if it were to occur, would have a fair value higher than the presently selling stock price, but I don’t see any potential acquirers over-reaching beyond CAD$50/share or so (which I think is the price that GNW will want to get). It just depends on how badly GNW wants this merger to complete – a purchase of GNW presently would gain 46% in value if the merger was completed – and they have huge issues of their own with respect to their long-term care insurance liabilities.

Genworth MI – Q3-2018: Steady with a signaled capital distribution

As long-time readers here know, I cover Genworth MI (TSX: MIC) exhaustively and in a public format. I do not currently hold shares in Genworth MI. You can also read the prior updates here and the Q2-2018 update here.

This quarter had to have been one of the most unremarkable quarterly reports since I remember covering the company, but this is in a “good” rather than bad sense. Q3-2018 was similar to the previous quarter in loss ratios (14%, which suffice to say is very low), and indeed very similar to the Q3-2017 quarter in almost every respect, other than the extra capital on the balance sheet and the slightly reduced share count (90.0 million to 91.7 million in Q3-2017, fully diluted). There was a very small drop in transactional insurance written, but I would deem this as an immaterial change.

There is a very slight uptick compared to last year in insurance written in Alberta and Quebec compared to BC and Ontario, but this is a very minor amount.

The company bought back $50 million of stock (1.11 million shares) during the quarter. They also raised the dividend (as they have done for each year they have been operating) to 51 cents per share from 47 cents per share quarterly. Book value is around $45/share.

The company also increased its credit facility from $200 million to $300 million, which they have left untapped, but this was because of their upcoming debt maturity (5.68% coupon) in June 2020 of $275 million that will come due. Right now this debt is trading above par and it is quite likely they will be able to refinance it, but they are keeping their options open. I also suspect this credit facility (which expires September 2023) is also used as a safety valve in case if something really bad happens in the Canadian housing market.

Most of the interesting information, however, was during the quarterly conference call. The company was talking about how they were in a position in 2019 to distribute $500 to $700 million in capital, and this may go in a combination of share buybacks or special dividends.

One thing that was unlikely, however, was insurance premium increases (they will mirror whatever CMHC offers).

Right now every single variable is favourable for MIC continuing to mint gold with selling mortgage insurance. The economy is good, the housing market in the segment they are most likely to service (first-time homebuyers) is still in very high demand, unemployment is low, etc, etc. When will the party end? Will it?