Equity – Page 93

Chesapeake Energy CEO quits

The CEO of Chesapeake Energy (NYSE: CHK) announced his resignation today, pending the confirmation of a successor being hired.

Because the CEO was a very flamboyant abuser of his position in the company (and for most intents and purposes is a poster child for anti-business political movements everywhere) the stock price will shoot up tomorrow – the market essentially communicating that the CEO was a liability to the company.

Although getting rid of him was a first step in many that has to be implemented to truly heal the company, I would anticipate once the primary shareholders get somebody in to thoroughly analyze the situation that they will find more bugs hiding underneath the rocks once they turn them over. It will probably take them a year and a bit to clean up and subsequently I would not want to be owning any stock while they clear out this baggage. Sentiment needs to get worse.

Genworth Financial restructures US mortgage insurance assets

Genworth Financial (NYSE: GNW) is up about 9% today on news that it will be implementing a plan to re-arrange the capital structure behind its US mortgage insurance units in such a manner that will basically leave the parent company with less “blow-up” risk concerning that business. This is assuming they receive regulatory approval, but this announcement surely would not have been announced had it not been floated by regulators first.

The implication for its majority-owned Canadian mortgage insurance subsidiary (TSX: MIC) is that there will be no requirement for a fire-sale of the MIC asset to raise capital for GNW.

MIC is up approximately 35% from its lows in July and August when I started to accumulate shares and GNW is up about 80% from the $5 baseline it was sitting at for the past year before this recent run-up. I guess I should have put money into GNW in addition to MIC, but I couldn’t make heads or tails out of GNW’s statements to a firm enough clarity for my own satisfaction.

At this point I am awfully curious whether GNW is still shopping around their Canadian mortgage insurance subsidiary or whether they’re just going to keep their ownership stake and collect dividend cheques. Genworth owns 57% of MIC and this represents $65.3 million in dividend income for them – 13 cents a share.

Dell going private makes sense

There are heavy rumours that Dell is seeking to go private. The mechanism will likely be through a leveraged buy-out assisted with some other capital partners.

The necessary condition for this to occur is shareholder approval, and since Michael Dell still owns a substantial portion of the company (about 14% according to the last DEF14 filing) there would likely be enough sway to ensure that it happens.

Business-wise, it is probably better for the company because it can then make strategic decisions that would otherwise not be possible if they were a reporting entity. Dell’s core business is clearly stagnating and going private will probably be the way for the financing firms to figure out how to carve out the various businesses within Dell and try to recapture some value in the marketplace.

Looking at raw cash flows in relation to a $10/share valuation, one can see where this thought process would proceed forward, especially if you can float some ultra-cheap debt financing in a yield-hungry bond market.

Genworth MI books a one-time gain

Genworth MI Canada (TSX: MIC) made an announcement today that reflected changes to the underlying legislation, the Protection of Residential Mortgage or Hypothecary Insurance Act and the impact on its balance sheet.

It had been accruing a government guarantee fund that was funded through gross premiums that effectively functioned as a corporate equivalent of an RRSP, with the difference being that there was an exit fee of 1% for every year the funds were deposited into the fund. Any deposits in the fund were tax deductible, but any withdrawals would be taxable.

In the new regime, this fund is now going to be collapsed, but without the exit fee. Thus, the company is basically going to book the exit fee (after taxes) as a gain, which will amount to about $135 million or about $1.37/share.

In exchange, the company is now going to contribute 2.25% of gross premiums to the federal government (as an expense and not into a guarantee fund) and their minimum capital test amount will be going up to an internal level of 185% (required is 175%) from the present 145% (required is 120%).

The implication here is that the company will be making more money in the future (all things being equal; this does not account for the decreases in real estate transaction volume that will be decreasing the premiums written in the future) and the company will have a relatively large amount of capital freed up to examine other options, including dividends or share buybacks. Management was previously burnt by spending $160 million on June 30, 2011 on a share buyback at $26/share. In light of the fact the company is trading well under book value, it would not surprise me to see them consider another one, or they could give out another dividend.

Investors would be cautioned that MIC will likely do what is in the best interests of Genworth (NYSE: GNW) as they own 57.5% of the company.

Shares of MIC are up 3.6% at present.

Assurant – Hurricane Sandy Losses

Assurant (NYSE: AIZ) reported after-market hours today that their loss exposure to Hurricane Sandy will be $200-$220 million and this is the only insurable event that will cost them more than $5 million to date for the quarter. The quarterly (year-end) report is due in February 2013.

In after-tax terms, this translates into about $127-$140 million or about $1.60-1.76/diluted share. This is better than what I was expecting in terms of damage, although you could see this already baked into the market price when looking at a stock graph:

It became apparent that Hurricane Sandy would be causing significant damage to the New York area at the end of October and investors subsequently took the stock down farther than what was likely warranted.

In terms of capital reserves, Assurant’s holding company has $617.6 million in available capital as of the end of September, which they keep $250 million reserved away, so this upcoming loss, while unfavourable, is not going to interrupt the company from continuing to mint money with its share repurchase program. Needless to say, I still view Assurant as a very good opportunity at present for appreciation.

If the market decides to take Assurant’s stock price lower from present levels, I will continue to add to my position.