Tag: MIC

Genworth MI (TSX: MIC) will report its quarterly and year-end results on February 4th. I am not expecting too much deviation from the previous year’s quarter. From the CREA, sales activity nationally are slightly higher than the levels they were in the previous year. The previous year had seasonal-related issues and this year (either Q4-2013 or Q1-2014) will likely have some seasonal-related issues due to the deep freeze that affected the eastern half of North America.  These weather related events will only shift demand around periods rather than reducing it.

Due to the latest federal regulatory changes (tightening) in mortgage financing kicking in on July 2012 (but constructively pulling some demand from Q4-2012 onwards into Q3-2012), year-to-year underwriting will likely be flattish from Q4-2012 because this will be the first full year-to-year comparison with the new regulations kicking in.

We can see the predominant trends for the company – premiums earned (the revenues earned from the actuarial performance of the mortgages that are being insured) continues to degrade slightly because of the run-down of past premiums written:

The only other item that I will mention is that claims and delinquent mortgages appear to be at an all-time low in Canada, despite all the talk about high consumer debt-to-income ratios.  This will eventually blow up in the faces of those that have accumulated the debt in the first place, but not today.  The lack of mortgage delinquencies will continue to mean that Genworth MI will be a cash generation machine.

There are a few negatives coming along the horizon.  One is that profitability of this magnitude tends to involve competitors, and I see Canada Guaranty is trying to cash in on this market – however, the barriers to entry with respect to regulatory compliance is not trivial and establishing sales networks and funnels will take quite a bit of time.

Another is that the OSFI is continuing to look at the capital framework on the property and casualty insurance industry in Canada.  In 2012, there was a significant change in the government guarantee fund which resulted in surplus funds being released to the company.  This risk is offset somewhat due to some guidelines already being released: for those that have the stomach to read this stuff, you can review the draft guidelines here, effective January 1, 2015.

Another negative are the usual concerns over the Canadian housing market that I won’t bother repeating here.

I do not foresee MIC continuing the share buyback at this price level, nor have I seen any insider purchases from SEDI lately.  The last slab of shares were repurchased in September at $29.23. They increased the dividend in the last quarter (they have been doing it on a yearly basis) and while I do not see them raising it again, depending on the results of the regulatory review, they do have room to declare a special dividend in the future.

Solvency-wise, the only maturity on the horizon they have is $150 million face value at December 15, 2015.  This debt issue has a coupon of 4.59% and in 22 months they can decide whether to refinance or just pay it off.  Management is also in a position to pay off about a $3/share special dividend and likely be within their own internal targets for minimum capital.

To summarize, I am not expecting fireworks out of this quarter, but I do expect consistent performance in line with previous quarters.  The company is far from the bargain basement price it was a year and a half ago, but I do believe it is continuing to trade within what I would consider my fair value range.  In the meantime, they continue to spit out cash.

Genworth MI (TSX: MIC) reported their third quarter earnings report yesterday evening. The highlights are not too dissimilar from their second quarter report (which I wrote about in an prior post) with the prevailing trends continuing:

– Year to year, gross/net premiums written continue to track lower this year than the previous, by about 12%, solely due to government regulatory changes. For the 9 months, premiums written were $382 million vs. recognized revenues of $430 million, so premium recognition at this rate should drop proportionately going forward.
– Loss ratios, and subsequently losses on claims, are the lowest they have been for a very, very long time. The loss ratio is 22% and this is incredibly low.
– The share buyback, as I reported earlier in the preview, brings down the shares outstanding to about 95.1 million. I very much doubt they will continue buying back shares at existing prices.

Also, while not directly relevant, they increased the dividend from 32 cents to 35 cents – historically they have increased the dividend by 3 cents each year. Cash-wise, the company has paid back $199 million to investors in the first nine months of the year and generated about $250 million through operations.

Portfolio-wise, they continue maintaining a bond portfolio – $5.06 billion, yielding roughly 3.7% at 3.8 years duration, and $219 million in dividend-yielding equity.

Business-wise, they’re clearly in a sweet spot where relatively few are defaulting on their mortgages and they continue to make a lot of money on insurance premiums. They also have a valuable vested interest in keeping the duopoly situation – the Government of Canada is the other player in the market via CMHC and they will obviously not want to pop the balloon which keeps them solvent as well. The question is whether this will continue and at least in the short term, it will. Market momentum might take this company higher than what its valuation on paper seems to be, which currently looks like what it is trading for presently. If we start seeing significant premiums over book value then I might consider paring back some of the position, but I am not in a rush to do so right now – even though due to appreciation this is starting to be quite a concentrated position.

Genworth MI (TSX: MIC) will be reporting earnings at the end of the month. They are likely to continue seeing historically high rates of mortgage conformance and as a result, they should be reporting a decent quarter as they continue to book earned premiums. Canadian unemployment continues to be steady (if not trending slightly down), which also suggests continued mortgage conformance in the future.

The other financial note is that the company spent $55 million repurchasing 1,892,643 shares at an average price of $29.06. They did this between September 3, 2013 to September 23, 2013. Not factoring in any dilution, this repurchase is about 1.96% of the outstanding shares. There is a market value to their share price where returns of capital are probably best given in dividends rather than buybacks, and it is very close to the $30 price range where I’d consider dividend increases would be a more efficient mechanism. Notably this time around, trading volumes were considerably higher than average. The public float of Genworth MI is only 43% of the total shares outstanding because the parent Genworth Financial owns 57% of the company, so the net buyback from the float was about 810,000 shares.

The buyback will alleviate the company from paying out $2.4 million a year in dividends at their current rate, or about a 4.4% yield, which is slightly better than their own investment portfolio, which at the end of June 30, had a book yield of 3.6% and coincidentally, a duration of 3.6 years.

I still believe the market is still placing a significant discount on the general perceptions of the over-valuation of the Canadian real estate market and other factors. While some of these concerns may have mid-term validity, they do not today.

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?