Tag: MIC

Genworth MI books a one-time gain

Genworth MI Canada (TSX: MIC) made an announcement today that reflected changes to the underlying legislation, the Protection of Residential Mortgage or Hypothecary Insurance Act and the impact on its balance sheet.

It had been accruing a government guarantee fund that was funded through gross premiums that effectively functioned as a corporate equivalent of an RRSP, with the difference being that there was an exit fee of 1% for every year the funds were deposited into the fund. Any deposits in the fund were tax deductible, but any withdrawals would be taxable.

In the new regime, this fund is now going to be collapsed, but without the exit fee. Thus, the company is basically going to book the exit fee (after taxes) as a gain, which will amount to about $135 million or about $1.37/share.

In exchange, the company is now going to contribute 2.25% of gross premiums to the federal government (as an expense and not into a guarantee fund) and their minimum capital test amount will be going up to an internal level of 185% (required is 175%) from the present 145% (required is 120%).

The implication here is that the company will be making more money in the future (all things being equal; this does not account for the decreases in real estate transaction volume that will be decreasing the premiums written in the future) and the company will have a relatively large amount of capital freed up to examine other options, including dividends or share buybacks. Management was previously burnt by spending $160 million on June 30, 2011 on a share buyback at $26/share. In light of the fact the company is trading well under book value, it would not surprise me to see them consider another one, or they could give out another dividend.

Investors would be cautioned that MIC will likely do what is in the best interests of Genworth (NYSE: GNW) as they own 57.5% of the company.

Shares of MIC are up 3.6% at present.

Genworth and subsidiary unit

Genworth (NYSE: GNW) shares have risen by about 25% over the past month:

gnw

This is presumably due to their reduction of exposure to US mortgage insurance liability. They also recently hired a new CEO. I tried analyzing them earlier when doing my purchase of Genworth MI Canada (TSX: MIC) without coming to any conclusions that made me feel warm and fuzzy, but MIC is also has been a somewhat more muted recipient of positive price action:

mic.to

Despite all the doom and gloom concerning the Canadian real estate market, at this time I do not believe that this is going to affect mortgage insurance. Increases in unemployment and subsequent employment instability will likely be the precursor to mortgage-related claims. Indeed, delinquency rates at present are considerably lower.

MIC should be trading closer to tangible book value (roughly $28-29/share) which I believe is a more accurate reflection of its market value. At a certain point if Genworth manages to stabilize its financial picture, its options with respect to MIC start to increase. While the market continues to figure out this picture, investors can continue to clip dividends ($1.28/year annualized) from the shares while the company is likely to report earnings around the $3/share range. This recovery in MIC’s market value will likely continue to accelerate if the recovery in the US housing market continues.

Genworth MI Canada’s third quarter

Genworth MI Canada (TSX: MIC) posted their third quarter yesterday. Highlights include a declining delinquency rate (down to 0.15%), lower combined ratio (down to 48% for the quarter), etc. The corporation continues to pile up equity on its balance sheet (book value now at $28.91/share without exclusion of intangibles), and they bumped up their quarterly dividend to 32 cents from 29 cents.

Basically the housing market in Canada has not gone into a huge tailspin as reported by the media – companies like Genworth profit incredibly by no cataclysmic events going on in the economy. The other financial proxies for large housing defaults are Home Capital Group (TSX: HCG) and Equitable Group (TSX: ETC) and their equity prices do not show signs of any imminent collapse.

MIC’s results in the fourth quarter will be materially impacted by the recent federal government changes announced to mortgage insurance rules, however. But the investment theory is that even if MIC shut down and ran their book off, they’d still have a value much closer to book value than their current market value today.

Right now, this is all “treat” and no “trick”. Happy Halloween!

Genworth Financial / Genworth MI Canada S&P note

A credit rating note on Genworth Financial (NYSE: GNW) and impact on Genworth MI Canada (TSX: MIC):

Oct 11 - Standard & Poor's Ratings Services said today that its 'AA-'
financial strength rating and 'A-' issuer credit rating on Genworth Financial
Mortgage Insurance Co. Canada and Genworth MI Canada Inc., respectively
(collectively referred to as Genworth Canada), and the stable outlook on these
ratings are unaffected by the recent downgrade of their ultimate parent and
majority shareholder, Genworth Financial Inc. (GNW) to BBB-/Negative/A-3
from BBB/Negative/A-2. The ratings on the Genworth U.S. life insurance companies
were also affected by these actions (for details see "Genworth Financial Inc.
Downgraded To 'BBB-'; Outlook Negative", published Oct 11, 2012, on
RatingsDirect on the Global Credit Portal). 

Although Genworth Canada is part of the GNW group, we consider there to be 
negligible links between the creditworthiness of GNW and Genworth Canada. We 
consider Genworth Canada to be non-strategically important to GNW. 
Accordingly, we attribute no support to the stand-alone credit rating on 
Genworth Canada from GNW. We are cognizant of the influence GNW has on its 
Canadian operations as a majority shareholder but, in our view, Genworth 
Canada has some protection against financial deterioration at the group level, 
aided by prudential supervision by the Office of the Superintendent of 
Financial Institutions, presence of independent directors on the boards of 
both the Canadian operating company and publicly listed holding company, and 
senior management/boards' recognition of the necessity of a financially strong 
entity in order to operate in the Canadian market, considering that the main 
competitor and largest player, Canada Mortgage and Housing Corp. 
(AAA/Stable/A-1+), is a highly rated federal government-owned entity. In the 
normal course of business, we expect Genworth Canada to return capital 
including payout of dividends. However, if the level of return of excess 
capital, in our view, hinders the company's very strong capitalization, the 
ratings could come under pressure.

The “non-strategic” nature of Genworth’s 57% investment in MIC would make it ripe for some sort of takeover bid if Genworth was going to fetch a reasonable price for MIC.

Misconceptions on Canadian mortgages

There have been quite a few media articles about how the recent rule changes has kneecapped the Canadian real estate market. It should be pointed out that these rule changes were strictly in the context of having CMHC (a federal crown corporation, so if they fail, then the public picks up the bill) insure such mortgages.

It does not include private lenders or insurers (such as Genworth (TSX: MIC)). So private lenders and insurers are free to make bone-headed decisions, such as providing zero-down financing and prime minus 1% rates to 450-rated credits if they deem it to be in their best interests.

Since the major chartered banks are really only interested in arbitraging their mortgage portfolio risk by getting CMHC to pick up the downside, they have been much more reluctant to give mortgages outside of the 25-year amortization, 5% down payment guidelines. The two major private lenders in the Canadian market are Equitable Group (TSX: ETC) and Home Capital Group (TSX: HCG) which have to make their own decisions with respect to giving out mortgages.

The share prices of both of these companies should be leading indicators with respect to the Canadian real estate market as a whole. The analogies in the USA, such as Novastar Financial, have long since gone insolvent for well-documented reasons. The semi-equivalent of CMHC, Freddic Mac and Fannie Mae are still publicly traded, but will not likely be returning capital to shareholders ever unless if the US government decides to make their obligations disappear.

I would be cautious of the Canadian private lenders without trying to thoroughly examining their loan portfolios. Doing this is not an easy job, even on the inside. They are producing disproportionately large earnings per share strictly through the usage of leverage, which in itself is not a bad thing, but you don’t know how secure those assets are. In the case of Equitable, one sees a company that has about $10 billion in mortgages outstanding, about $5.3 billion of it has been securitized (wrapping them up in happy packages, insuring them, and then selling to market) – the only problem of the securitized assets is that your net interest margins on them are piddling low – 0.49% in the last quarter, compared to the very relevant 2% more you get with the non-securitized assets.

ETC’s book value per common share is $27.46 (at June 30, 2012) and is currently trading at $31.49, so there is a premium assigned to their operations.