Genworth Mortgage Insurance Canada MIC
December 29, 2009 - 9:42pm EST by
xanadu972
2009 2010
Price: 27.00 EPS $2.65 $2.67
Shares Out. (in M): 118 P/E 10.2x 10.5x
Market Cap (in $M): 3 P/FCF NA NA
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT NA NA

Sign up for free guest access to view investment idea with a 45 days delay.

Description

 I believe Genworth Mortgage Insurance offers at least 40% upside, and is an attractive business that will compound capital at 20%+ until this higher valuation is realized. 

  • Attractive valuation
  • o Naively, MIC should trade for at least 1.5x forward book considering it can generate 15% returns without re-investment of excess capital.
  • o With excess capital being dedicated to repurchases, Genworth could generate $7.39 per share in earnings in 2014, which discounted back would imply $5.05 in 2010 earnings. Also, this assumes 1% of the equity per year is given to mgmt.
  • Misunderstood business
  • o Investors mistakenly think of the Company and of the Canadian housing market in a manner shaded by those of the United States. First, Genworth Mortgage Insurance is one of two mortgage insurers in Canada, and the only private one, making the returns much higher than mortgage insurers in America (the Company's cash returns on capital have been double that of its' American counterparts). Also, Canada did not have a housing bubble similar to the United States for two very important structural differences: 1. In a Canadian mortgage default, the lender can go after all of the borrowers assets and wages; 2. Canadian mortgages were largely kept on bank's balance sheets (outside of mostly govt securitizations of high quality mortgages) which gave them a great incentive to care about the quality of the borrower. If you are interested, I have also pasted a comparison between US and Canadian mortgage delinquencies below.
  • Spin-off dynamics
  • o Genworth Mortgage Canada was spun out of Genworth in the United States to meet desperate liquidity needs.
  • o Genworth still owns a majority stake in the business which makes institutional ownership problematic.
  • Shareholder friendly capital allocation
  • o The Company announced dividends yielding ~4-5% and intends to return excess cash through buybacks or further dividends. Buybacks were avoided this time due to the small float.
  • Competitive landscape
  • o Genworth MI Canada is now free of its' stressed parent, which at the very least gave customers reservations and competitors a talking point. It is possible that the parent placed explicit restraints, although I don't have any datapoints supporting affirmative or negative conclusions.
  • a. My market share assumption imply that Genworth MI can regain its' 35% market share. Its' previous growth rate would support this, but it has slipped to 25% market share.
  • o PMI and AIG were unsuccessful in their attempts to enter the business over 3 years, and have now been hamstrung. Especially given the liberal misuse of AIG's balance sheet in previous years, I view this as a strong indication of the barriers to enter.
  • Trough economics (I have a lot of data, so I will respond to specific questions related to this)
  • o Genworth MI Canada's revenues and earnings are currently depressed as a result of the drop in housing sales, house prices and general economic malaise. New home sales, house prices, employment and Canadian GDP have all increased in recent months and quarters.
  • o At the near term price trough, Genworth MI Canada had the following LTV's weighting by insurance inforce.

2002

2003

2004

2005

2006

2007

2008

2009

50%

58%

63%

70%

80%

93%

95%

92%

 

  • Assumption synopsis
  • o Combined ratios of 60% in 2010, 45% in 2011 and 40% going forward
  • o Premium and GDP growth of 3% in 2010 forward.
  • o Market share gains to 35% by 2011 linearly from 26% in 2009.
  • o Company supplied recognition curve:

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

5.0%

18.0%

19.0%

17.0%

12.0%

8.0%

5.0%

3.3%

 

 

Risks:

I would actually recommend weighting until Genworth distributes shares, which I expect, and would buy around $24.

Competition with a government sponsored company.  

Invalid conclusion that the Canadian housing market has stabilized.

 

 

 

 

 

Catalyst

1. Reversal of market share losses.

2. Stabilization of Canadian housing (which there are already signs of).

    show   sort by    
      Back to top