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Genworth MI Canada Inc. Q2-2020 Earnings, Price Target Update

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Genworth MI Canada Inc.(MIC-TSX) has been a leading Canadian private residential mortgage insurer since 1995, providing mortgage insurance services to Canadian chartered banks, trust companies and other lending institutions. Genworth Canada was 57% owned by Genworth Financial (GNW-NYSE) who operate in the US. Genworth Financials interest was acquired by Brookfield Asset Management through their subsidiary Brookfield Business Partners (BBU.UN) in Dec-2019. Federally regulated lenders in Canada are required to purchase transactional (high ratio) mortgage insurance in respect of a residential mortgage loan whenever the loan-to-value ratio exceeds 80%. They also provide portfolio mortgage insurance to lenders for loans with loan-to-value ratios of 80% or less. Transaction mortgage insurance comprises about 90% of revenues. Funds held in an investment portfolio pending possible claims payouts, contributed approximately 30% of income before tax, the balance primarily from transactional (high ratio) insurance. Profits are earned from insurance fees, and the investment portfolio after operating expenses, regulatory reserves, interest and costs of foreclosures are paid. Genworth invests the premiums earnings in an actively managed portfolio that was $6B at Dec-31-2019 and $5.8B as at Mar-31-2020 and $5.5B at Jun-30-2020. The portfolio is mainly comprised of highly rated fixed income securities and preferred shares earning an average annual rate of 3.2%. Mortgage insurance premiums contribute approximately 70% of earnings, investment income -30%.

By province approximately 43% of mortgages insured are in Ontario, Quebec-20%, BC-14%, Quebec -13%, Prairies – 5% and 5% in other Canadian province. The Canada Mortgage and Housing Corporation (CMHC) a crown corporation, is their main competitor.

Their mortgage business focuses primarily on high ratio (transactional) mortgages. Approximately 87% of mortgages in Canada are originated with a loan-to-value ratio of greater than 80%, considered high loan-to-value mortgages. Lenders may also obtain mortgage insurance for mortgages with loan-to-value ratios of 80% or less, known as low loan-to-value or portfolio mortgages. High loan-to-value mortgages typically represent about 90% of the gross premiums written, and low loan-to-value mortgage insurance represents 10%. To the extent that home prices appreciate over time and/or the principal amount of the loan is paid down, the effective loan-to-value of the insurance written in a given year decreases. The value of mortgages to total home value is estimated at 60%. High loan-to-value new insurance written is comprised of approximately 65% of five year fixed rate mortgages or terms of longer duration and 35% are variable rate mortgages.

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