My previous projection on Genworth MI’s (TSX: MIC) Q3-2014 was mostly in-line.
Specifically, I projected a dividend increase (which was done – from 35 cents to 39 cents), and a likely chance for a special dividend (which will be 43 cents this quarter). Operating EPS was slightly less than I expected (95 cents diluted vs. “around $1” expected) and this was primarily due to the larger loss ratio.
A few notables:
1. They wrote $217 million in premiums this quarter, which indicated a very high volume market for mortgage insurable Canadian real estate. Year-to-year, about $20 million of the $56 million increase was due to the premium increase announced by CMHC earlier in the year. The rest of it is sheer volume, mostly in the high loan-to-value business (i.e. highly leveraged loans).
2. Loss ratio was 21%, slightly higher than I was expecting but still quite low by historical standards. The MD&A projects “35-40% over an economic cycle” and for those of you that are mathematically astute, this implies that there will likely be times where the loss ratio will be at the 60-70% range (and the common stock would be quite battered at this rate was it would show the entity as barely making any money and shelling out huge amounts for mortgage claims).
3. Delinquency rates are still quite low although they went ever so slightly up from quarter to quarter, interestingly enough in the low loan to value category. I believe this is just white noise.
4. OSFI regulations regarding minimum capital for mortgage insurers has more or less been finalized and using 2015 standards, has the company at a 223% position in terms of minimum capital required – the company’s internal target to survive a prolonged recession is 220%. This excess capital is presumably given off in a special dividend.
All-in-all, the company is continuing to mint cash and shareholders should be extremely happy. The downside to this is that I can’t really see how things can get any better for the company. Maybe if CMHC pulled out of the mortgage insurance market, but there is no way the federal government will allow this cash cow to stop generating money for the federal coffers.
At current valuations (CAD$40/share) I cannot recommend a purchase. It is on the upper end, but not quite exceeding, my fair value range for the company. This has been a big winner for me over the past couple years and it will be sad to see it leaving the portfolio, but superior gains are only to be made when there is blood on the street. A couple years ago, the blood was projected to be in Canadian real estate. Right now it is elsewhere.