Assurant – Third Quarter

I went through the recent 10-Q of Assurant (NYSE: AIZ) and little has changed from my original investment assessment, mainly that the company’s equity should be trading higher than current market pricing.

There continues to be some risk on their lender-placed insurance business (which is a fancy way of describing mortgage providers putting home insurance on delinquent housing owners) as AIZ was forced to take a 30% rate haircut in California starting at the beginning of 2013. There will likely be price concessions in other states which will cut into the company’s profitability, but as the housing market in the USA starts to improve and the number of underwater mortgages continues to decrease, this revenue stream was likely to slow down regardless. The specialty property segment produced a combined ratio of 76.5% for the first 9 months of 2012 and this ratio is very likely to increase in 2013.

Their health insurance unit is at 97.2%, while employee benefits is at 106.4%.

Even with the premium haircut from their specialty insurance business, they are very likely to continue generating cash at a rate where they can continue repurchasing their undervalued shares at a significant discount. At the current share price, buybacks become extremely accretive. Since the company’s book value is about $54.05/share when excluding intangibles, each dollar of shares purchased (at the current market value of $38) is the equivalent of receiving $1.42 of value, plus the organic earning capacity of the company, which is very high relative to price.

The company is trading at the rate it is because of continued fears that regulators will continue to encroach in the profitability of the business in addition to industry-wide concerns (e.g. earnings yields from their investment portfolios) but there is a lot of margin of error for this one. When considering that the amount of raw income the company produces in the first 9 months of 2012 was nearly the same as the net income of the entire 2005 fiscal year (when the stock prices were trading at relatively the same price), coupled with the fact that average shares outstanding went from 136 million to 86 million, gives some hints as to what I believe the market value of this firm should be.

Genworth MI Canada’s third quarter

Genworth MI Canada (TSX: MIC) posted their third quarter yesterday. Highlights include a declining delinquency rate (down to 0.15%), lower combined ratio (down to 48% for the quarter), etc. The corporation continues to pile up equity on its balance sheet (book value now at $28.91/share without exclusion of intangibles), and they bumped up their quarterly dividend to 32 cents from 29 cents.

Basically the housing market in Canada has not gone into a huge tailspin as reported by the media – companies like Genworth profit incredibly by no cataclysmic events going on in the economy. The other financial proxies for large housing defaults are Home Capital Group (TSX: HCG) and Equitable Group (TSX: ETC) and their equity prices do not show signs of any imminent collapse.

MIC’s results in the fourth quarter will be materially impacted by the recent federal government changes announced to mortgage insurance rules, however. But the investment theory is that even if MIC shut down and ran their book off, they’d still have a value much closer to book value than their current market value today.

Right now, this is all “treat” and no “trick”. Happy Halloween!

Progress Energy takeover stopped – strategic implications

The stoppage of the Progress Energy (TSX: PRQ) takeover (news article) is something significant – Canada is starting to become serious about protecting its energy resources.

Something has strategically shifted in terms of resources companies, and this will have implications domestically for investors of energy companies. The foreign takeover premiums that are embedded within various energy companies will drop and this will also likely have an effect on decreasing the demand on Canadian currency. This also has implications for the Nexen takeover – it is likely that Nexen will probably have to divest its share in Syncrude since China already has 9% of Syncrude and Nexen currently owns 7% of Syncrude.

Politically speaking, this is going to be a case of short term pain for long-term gain. I would guess that the concept is that the Canadian government believes that global trade might be impacted in the future, especially with respect to energy, and maintaining high levels of domestic energy reserves seems to be prudent. So if companies are going to get access to Canadian energy, it will have to be through domestic Canadian operations.

I’m guessing this is also a signal that taking a minority stake is the best route for foreign access to domestic energy reserves.

However, if you have shares in PRQ or NXY, the lesson here is simple: should have sold out instead of waiting for the merger to formally proceed.

Twiddle thy thumbs

While one should always be vigilant at looking for opportunities, sometimes there are none and that sticking to your existing portfolio is the best thing you can do.

In order for any investment to be successful, you need to make two critical decisions. The decision to buy, and the decision to sell. If you get the buy correct, but ruin it by an incorrect sell decision, the results are quite depressing. Just look at those people that bought Apple at $50/share and thought it topped out at $100. Sometimes those decisions are good – if you dumped RIMM at $60 a couple years ago, you’d be laughing.

Traditionally in my own investment history, my entries have been quite good, but most of my sell decisions have been early to the game. I have been trying to improve this.

Genworth Financial / Genworth MI Canada S&P note

A credit rating note on Genworth Financial (NYSE: GNW) and impact on Genworth MI Canada (TSX: MIC):

Oct 11 - Standard & Poor's Ratings Services said today that its 'AA-'
financial strength rating and 'A-' issuer credit rating on Genworth Financial
Mortgage Insurance Co. Canada and Genworth MI Canada Inc., respectively
(collectively referred to as Genworth Canada), and the stable outlook on these
ratings are unaffected by the recent downgrade of their ultimate parent and
majority shareholder, Genworth Financial Inc. (GNW) to BBB-/Negative/A-3
from BBB/Negative/A-2. The ratings on the Genworth U.S. life insurance companies
were also affected by these actions (for details see "Genworth Financial Inc.
Downgraded To 'BBB-'; Outlook Negative", published Oct 11, 2012, on
RatingsDirect on the Global Credit Portal). 

Although Genworth Canada is part of the GNW group, we consider there to be 
negligible links between the creditworthiness of GNW and Genworth Canada. We 
consider Genworth Canada to be non-strategically important to GNW. 
Accordingly, we attribute no support to the stand-alone credit rating on 
Genworth Canada from GNW. We are cognizant of the influence GNW has on its 
Canadian operations as a majority shareholder but, in our view, Genworth 
Canada has some protection against financial deterioration at the group level, 
aided by prudential supervision by the Office of the Superintendent of 
Financial Institutions, presence of independent directors on the boards of 
both the Canadian operating company and publicly listed holding company, and 
senior management/boards' recognition of the necessity of a financially strong 
entity in order to operate in the Canadian market, considering that the main 
competitor and largest player, Canada Mortgage and Housing Corp. 
(AAA/Stable/A-1+), is a highly rated federal government-owned entity. In the 
normal course of business, we expect Genworth Canada to return capital 
including payout of dividends. However, if the level of return of excess 
capital, in our view, hinders the company's very strong capitalization, the 
ratings could come under pressure.

The “non-strategic” nature of Genworth’s 57% investment in MIC would make it ripe for some sort of takeover bid if Genworth was going to fetch a reasonable price for MIC.