July 30, 2010

Recently, Genworth MI Canada clarified the plan to return a significant amount of capital to shareholders that was originally announced last April.  Management has announced a substantial issuer bid, offering to purchase and cancel up to $325 million of the Company’s common shares between $24.00 per share and $28.00 per share.  The offer will remain open for acceptance for 35 days after the “date of commencement”, which is expected to be July 19, 2010.  Genworth Financial Inc., the Company’s US-based parent, has advised the Company that it intends to tender to maintain its pro-rata ownership stake at the current 57.5% level.

We are very pleased with this development and wholeheartedly agree with management’s rationale.  As Brian Hurley, Chairman and CEO, said, “Our board of directors believes that the recent market price of the Company’s common shares does not fully reflect the value of our business and future prospects.  This offer represents an equitable and efficient means of returning capital to our shareholders and allows the Company to continue to pursue our growth agenda”.

To assess the impact of the issuer bid, assume that Genworth completes the full buyback at the mid point of the range or $26.00 per share.  The Company will therefore repurchase and cancel 12.5 million shares.  However, the current consensus earnings estimate for 2011 of $365 million should be reduced by the amount of after-tax interest on the Company’s new $275 million senior unsecured debentures, and falls to approximately $355 million.  Considering these factors together, expected EPS should increase from $3.12 per share to $3.39 per share or almost 9%.  At the current, and depressed, forward multiple of 7.7 times earnings, we believe that the buyback should add approximately $2.00 per share to Genworth’s stock valuation.  Multiple-expansion is also possible, which would further enhance this proactive, valuation-creation strategy.

August 27, 2010

Genworth MI Canada has just released the preliminary results of its substantial issuer bid.  With the tender closing during a week of horrible housing data, including a 27% decline of US existing home sales, perhaps it was no surprise that the bid was oversubscribed.  More than 19 million common shares were tendered and the Company expects to take up approximately 12.3 million shares at a purchase price of $26.40 per share, slightly above the mid-point of the range of $24.00 to $28.00 per share.  These results were consistent with our estimates, as we were assuming a price of $26.00 per share and 12.5 million shares repurchased to calculate earnings accretion of almost 9%.

Since the bid was oversubscribed, shareholders who tendered will have the actual number of shares repurchased prorated.  Genworth Financial, the parent entity, participated in the bid by making a proportionate tender and is expected to continue to hold approximately 57.5% of the outstanding common shares of the Company.  Post cancellation, approximately 104.8 million common shares will remain outstanding.

We believe that there are two potential positive catalysts that could occur in the near future.  First, we believe that Genworth MI Canada may be included in the S&P TSX Composite Index at the next quarterly rebalancing on September 10, 2010, effective after market close on September 17, 2010.  Indexer buying could prove supportive of the stock subsequent to the issuer bid.  Further, Genworth’s balance sheet is still sufficiently capitalized to support a small dividend bump.  If we assume that the Company saves $10.8 million in dividend payments, after canceling 12.3 million shares, which is then distributed across the remaining shares outstanding, the dividend could be boosted approximately $0.10 per share on an annualized basis.  Management’s confidence in their business should bode well for the stock in the future.

November 5, 2010

With the release of the Company’s third quarter results, Genworth MI Canada Incorporated surprised investors and hiked its dividend.  Even after Genworth’s substantial issuer bid, the regulatory capital ratio or Minimum Capital Test (MCT) ratio was 153%, well above the Company’s internal MCT target of 145%.  In response, the Board of Directors approved an 18% increase in the dividend from $0.22 to $0.26 per share on a quarterly basis.  At current price levels, the $1.04 annualized dividend yields approximately 3.9%.  Needless to say, we were quite pleased with this decision.

Genworth’s third quarter financial statements corroborate management’s confidence in their business.  In the quarter, net premiums written increased 6% sequentially and 60% year over year to reach $166 million as a result of a strong spring housing market, improved market penetration and higher average premiums.  Also on a positive note, losses on claims of $47 million declined $2 million sequentially and $17 million on a year over year basis.  The loss ratio improved to 30% from 32% in the second quarter and 42% a year ago.  Investment income of $45 million was $3 million higher sequentially and $2 million higher year over year.  Net operating income totaled $92 million or $0.81 per fully diluted common share compared to $86 million or $0.73 per share a year ago.

During the conference call, management discussed their outlook for the Canadian housing market.  They suggested that tighter mortgage insurance criteria and the Harmonized Sales Tax in Ontario and British Columbia, that took effect July 1, pulled forward some housing demand from the second half of 2010.  However, management suggested that the housing market is normalizing, with supply and demand becoming balanced, which is positive for the health of the overall market.  Further, improving consumer confidence, low mortgage rates for the foreseeable future and stabilizing unemployment all bode well for home sales across Canada.

Genworth MI Canada now has $5.3 billion in total assets, an investment portfolio of $4.9 billion, $1.9 billion in unearned premiums in reserve and $2.6 billion in shareholders’ equity or $24.30 per fully diluted share.  With an operating return on equity of 14%, we believe that various regression models indicate that the 10% premium to book value is too cheap.  With $2.27 per fully diluted operating earnings per share year to date and the potential to earn over $3.00 per share for the full year, we believe that a price to earnings multiple less than ten is too low.  With a dividend yield of approximately 3.9% compared to 1 year GIC rates at 0.75% and Canadian 1 year government bonds at approximately 1.2%, we believe that the stock remains relatively undervalued and should move higher over the next twelve months.

September 16, 2011

In the midst of depressed common stock prices, it is our view that Genworth MI Canada (MIC) remains extraordinarily cheap at current levels. The company reported its second quarter results on July 29th, and demonstrated another quarter of strong operational performance.  Genworth’s Q2 2011 operating income totaled $0.77 per share, compared to $0.72 in Q2 2010 and $0.74 in Q1 2011. Driven primarily by spring housing activity, Genworth’s Q2 2011 net premiums increased by 32% sequentially to $149 million. The company’s loss ratio of 33% also represented a 5 point sequential improvement, which is attributed to seasonality and regional delinquency improvements.  At Q2 2011, Genworth maintained an investment portfolio of $5 billion, and had $1.85 billion in unearned premium reserves, which will be earned into premiums over time.

From a valuation perspective, MIC is presently trading at 0.8x its book value of $25.59, and provides an attractive dividend yield of 5.0%. Genworth also recently completed a substantial issuer bid and purchased a total of 6,153,846 common shares at a price of $26.00 per share, representing 5.87% of its common shares outstanding.  Genworth Financial, the principal shareholder of the company, participated in the issuer bid and continues to indirectly hold 57.5% of MIC.

November 4, 2011

On November 3rd, Genworth MI reported Q3 2011 results that demonstrated sequential improvement in operating performance. During the quarter, MIC generated EPS of $0.81 compared to $0.77 in Q2 2011, which was in-line with consensus analysts’ estimates of $0.81. Net premiums written also increased sequentially to $160 million in Q3 2011 compared to $149 million in Q2 2011, while ROE was consistent quarter-over-quarter at 13%.

On the conference call, management indicated that the underlying fundamentals of its business remain solid, with a balanced housing market continuing to be supported by a low interest rate environment. As a result of MIC’s consistent level of profitability and positive outlook, the company increased its quarterly dividend by 12% to $0.29, which equates to $1.16 on an annualized basis. In addition, the company also announced a $0.50/share special dividend that will be paid on December 1st. Management believes this is the most efficient means of returning capital to shareholders and is indicative of its strong financial position.

A concurrent development at its parent company, Genworth Financial, which owns about 57.5% of MIC, could serve as a catalyst for the company’s shares.  Last night, Genworth Financial announced that it would sell up to 40% of its Australian mortgage insurance business (which has a book value of $2 billion) by way of an Initial Public Offering in 2012. This is significant for MIC shareholders as there had been considerable speculation that Genworth Financial may be required to divest its interest in MIC to raise capital. As a result of this development, we believe a significant overhang could be removed from MIC’s stock.
 
It is our view that Genworth MI remains extraordinarily cheap. At current levels, MIC shares are trading at more than a 10% discount to its Q3 2011 book value of $26.82 per share, and a 7.3x P/E multiple based on 2012 consensus estimates. We believe that management is executing well on its business plan, and following the 12% dividend increase, MIC shares provide an attractive 4.8% yield.