Genworth MI (TSX: MIC) reported their year end results last week.
Operationally they’re still minting a lot of money – loss ratio is 20% for the quarter, expense ratio is 20%, so they continue to earn 60 cents pre-tax for every dollar of insurance premium revenue they book. There doesn’t appear to be any storm clouds on the horizon.
An observation I will make is that with the new majority shareholder (Brookfield), they appear to now be deliberately targeting a higher return on equity policy. The company has been distributing a lot of cash in the form of special dividends:
During the fourth quarter of 2019, the Company paid a special dividend of $1.45 per common share, for an aggregate amount of approximately $125 million, on October 11, 2019 and a special dividend of $2.32 per common share, for an aggregate amount of approximately $200 million, on December 30, 2019. On January 15, 2020, the Board of Directors declared a special dividend of $2.32 per common share for an aggregate amount of approximately $200 million. This special dividend will be paid on February 11, 2020 to shareholders of record at the close of business on January 28, 2020.
In the span of a few months, the company has given off $6.09 in special dividends. Obviously I sold my shares too early! With these special dividends, however, the company is trading at about a 30% premium over book value, which is uncharted territory. Clearly given the cash generation capability of this business, it is likely to continue, but I have always wondered when there will be more competitive pressures in this market space – which if it occurs, will result in a dramatically reduced profitability landscape for the company. It won’t be triggered by the federal government – CMHC makes the lion’s share of the profit in this marketplace.
The company is obviously going to increase its leverage in the near future – on January 16, 2020 they took out a credit facility to allow them to borrow $200 million for a year, and another $500 million for 5 years. Part of this will be to rollover the $175 million in debt they have that will mature on June 15, 2020 but the remainder of it will probably head out the window in the form of special dividends so they can increase their return on equity from 11% to something higher.
Such strategies work until they start to face a large amount of mortgage claims whenever this near-mythical next recession occurs!
What are your thoughts on MIC now? We’ve had that “near-mythical next recession”. They seem to be navigating the waters fairly well. Do you think this a matter of when all the government bailouts expire then the pain will be felt?
Sacha,
Have you done any work with GNW – the old MIC’s parent entity. With their buyout from a Chinese entity seemingly discounted by the market. Any value there as the standalone entity.
Thanks.
I’ve been slammed with quarterly reports and the usual life obligations so MIC was on a lower priority review bucket. One issue with having a fairly spread out portfolio is that when you review reports and CC transcripts of companies you own, there’s a lot more work to keep up with more positions!
On MIC, I think the market is fairly balancing the risks. Their income portfolio is going to get kicked because of the low rate environment (case and point – just look at the massive unrealized loss they have on their preferred share portfolio – if I was management I would have likely made the same mistake so I’m not blaming them for it), coupled with strata units in Canada that are going to receive continued depreciation (lower immigration, strata insurance pressures come to mind) which will put stress on mortgage debts.
A lot of single family residential (e.g. here in Vancouver) is not mortgage insurable because of the $1M price ceiling. On the flip side (positive), mortgage obligations are the first priority payment for a financially stressed public, but (negative) when you factor in unemployment and the cessation of CERB, etc., there are clear paths where MIC’s loss ratios will start to climb. People that took a high ratio mortgage and lost their job in COVID will have to be the marginal risk at this point. The impact of COVID-19 and unemployment will take a few quarters before the real defaults start occurring.
As for GNW, I’m not interested. I would be interested if they float an IPO of their US MIC entity.