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?