Genworth MI Q2-2018: Steady as it goes

Genworth MI (TSX: MIC) reported second quarter earnings yesterday. This quarterly report could be classified as “more of the same” as the previous quarters, exhibiting low loss ratios (14%, with the company decreasing guidance to the 10-20% range), with a slight increase in delinquencies and losses on claims.

Here are some other notables:

* The number of units of transactional insurance written was down 7% from the same quarter in the previous year, but the amount of premiums written remained steady due to price increases (OSFI regulations for capital requirements changed, hence the price increases).

* There was a large increase in Quebec transactions in Q2, about 25% – this was seasonally seen in the previous year’s quarter as well, at 22%. But this is the highest I have seen in some time for Quebec.

* The amount of the portfolio above a 80% loan-to-value ratio remains steady at 42%. The bear case scenario would have this number rise (primarily due to assessed home values declining faster than the proportionate mortgage principal declining).

* Delinquency rate is 0.19%, up from 0.18%, but this is small enough that I would consider this statistical fluctuations rather than anything resembling a trend. Alberta and Ontario were the primary reason for the very mild increase.

* Their investment portfolio is relatively unchanged – about half a percent more invested in preferred shares. Their interest rate swap continues to pay off (fair value of $135 million) on $3.5 billion notional value. I commended the CFO for entering in this transaction on earlier posts. As short term rates rise, this interest rate swap should continue to pay off further – I suspect another percent or so and they’ll close it.

* Book value goes to $44.40 on diluted shares outstanding, the current market price is at a premium to book (which is not common for MIC). The minimum capital test ratio remains at 170% – this ratio will increase with retained earnings, but will increase/decrease if mortgages exhibit decreased/increased LTVs due to property appreciation/deprecation (which is the much stronger factor here for bull/bear cases). The company is likely to raise the dividend next quarter to 50 cents/share as they are tracking at the lower end of their payout ratio.

* Finally, they have a June 15, 2020 bond (5.68%) that is now under 2 years to maturity. The credit markets currently are quite favourable and it would not surprise me if they floated another bond offering with a 10-year term. They should be able to shave off at least a hundred basis points on the transaction.

To conclude, there is not much evidence at present for a bear case. Things are going as well as they can financially for Genworth MI. Not surprisingly, this is why the stock is at the highest point it has ever been. Will it continue? I don’t know. Readers on this site will know I very recently sold all my shares in Genworth MI, but I have no extraordinary knowledge that would suggest that the stock will go down anytime soon.