Genworth MI (TSX: MIC) reported second quarter results yesterday. They continue being a cash generation machine, with the latest quarter reporting a 0.12% delinquency rate on mortgages and a 43% combined ratio. With this and some investment gains, the company was able to report $88 million in operating income, or 89 cents per share.
Severity on claims was also down to 30%, from 34% a couple quarters ago.
The only negative a discriminating investor could see is the amount of insurance written this quarter was down about 40% (translating into net premiums written down by 22%), but this is strictly due to the federal government’s intervention on mortgage rules. It will also have a corresponding positive impact on claim frequency as the insurance pool will be of higher quality. It should be important to note that insurance companies make profits on underwriting risks that are priced below actual risk, not on sales volume.
On the balance sheet side, the company remains overcapitalized and has commenced its share repurchase since early May; they bought back 2.01 million shares at an average price of $24.88/share. This was a very astute purchase. It is likely they will keep repurchasing shares from the market until the buyback is exhausted, which will likely be at the end of the third quarter at the rate they are going. After that, they will probably look at the share price before deciding whether to increase the buyback or just give out a special dividend. Tangible book value at the end of Q2-2013 is $29.48/share.
Otherwise, there is not too much to report in this quarter report that hasn’t already been covered in previous reports of Genworth MI. While it is not the screaming value buy it was back last year when it was trading at $18/share, at $28/share, it is still undervalued and the share price still represents a degree of skepticism on the Canadian real estate market and the fortunes of the parent subsidiary that owns 57.4% of Genworth MI (Genworth Financial, NYSE: GNW). As long as one does not forecast some precipitous collapse in the real estate market (which will occur if unemployment rises suddenly) or interest rates start to rise rapidly (which would cause a country-wide devaluation of real estate assets), I still am amazed that this company has traded under $30/share for so long. It will get there.
Investors are also paid to wait, with a 32 cent dividend, which represents a 4.57% yield at a $28 share price.
As people are aware, there are two major players in the Canadian mortgage insurance market: the 100% federally-owned CMHC, and Genworth MI. Both entities are making insane amounts of profits for their shareholders (in the former case, for the public, in the latter for the shareholders) and it is rather reassuring to know that there is alignment between the government’s interests and the company’s – mainly keeping the premiums for mortgage insurance considerably higher than what appears to be needed. This is obtaining duopoly-style pricing without all the media attention. Finally, investors in Genworth MI also have to take into consideration the motivations of the parent subsidiary, which currently seems to be in the role of a passive investor at the moment that is clipping dividend coupons and cashing out shares as needed (this is in proportion to the buyback). Whether Genworth MI gives out its cash as dividends or as a share buyback does not make too much difference to me, although back at $25/share I was quite happy to see the shares repurchased. At $28, lesser so, but the breakeven point would be $30 for me, where I’d believe it would generate more value for dividends to be the conduit for excess cash.
Suffice to say, I am still long and am not interested in selling at current prices. They are still trading at less than tangible book value and generated $1.85/share in cash for the first half of the year. Why would anybody want to sell unless if they are panic-stricken?
I’m still holding on.
When i cash my chips out, i will make a donation to the charity of your choice.
Thanks for the tip!
RIP POT
Yes, it seems that the only sustainable commodity industry these days (especially in British Columbia) is pot, not potash!
Just be warned that I’m somewhat concerned about this parabolic rise in MIC’s price as history would suggest that there is a better chance than not once the robot has done his aggressive accumulation, that there will be some price compression. That said, the continuing buyback will likely be serving as a buffer.