Is the mortgage business still profitable?

Genworth is the largest private residential mortgage insurer in Canada. The company offers both transactional and portfolio mortgage insurance. It provides mortgage default insurance to Canadian residential mortgage lenders. Genworth MI Canada changed its brand to Sagen MI Canada effective October 13th, 2020.

It now operates as Sagen MI Canada.Genworth is known for delivering value at every stage of the mortgage process. The company operates through its subsidiary, Genworth Financial Mortgage Insurance Company Canada (Sagen).

With more than two decades of experience, Genworth has developed deep relations with lenders, brokers, realtors, etc., and has built a broad underwriting and distribution platform across Canada.

The company has helped more than 1.7 million families buy their own homes and has supported over 250 Canadian lenders. Genworth provides tailored mortgage insurance products that help customers buy homes with as little as a 5% down payment.

Genworth primarily caters to first-time homebuyers in the 25-45 age bracket and with a $106K average household income. As at September 30th, 2020, the company had $7.1 billion in total assets.

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Revenue Growth & Market Exposure

Genworth’s subsidiary, Genworth Financial Mortgage Insurance Company Canada is the largest private sector residential mortgage insurer in Canada. Genworth has benefitted from higher transactional premium rates due to improving home sales across Canada.

It has increased its transactional insurance market share as well as experienced growth in its transactional new insurance written and higher premiums written. Premium rates on portfolio mortgage insurance are generally lower than those on transactional mortgage insurance due to the lower risk profile associated with portfolio loans.

Genworth’s proactive risk management strategy and comprehensive underwriting practices provide it an edge over the competition. As a result, the company has successfully reduced its loss ratio to 13% at the end of 2020 from 17% in the last year and 25% six years ago. Its loss ratio reflects the value of a high-quality, well-diversified insurance portfolio in a resilient economic environment. 

Genworth’s mortgage insurance operating platform is known for offering the best in class customer experience, a high-quality insurance portfolio, and innovative loss mitigation solutions. As the pipeline of future first-time homebuyers grows, mortgage insurance becomes indispensable. It is mandatory for less than 20% down payment, and a 100% coverage protects lenders against default risk.

Genworth continues to witness positive momentum in the housing market in most major markets. It is experiencing a strong pickup in first-time homebuyer activity. Low interest rates, a rational housing market, and a recovering economic environment are strong tailwinds for this trend. The company is in a good position to gain from improving employment opportunities across Canada. MIC premiums written are expected to be modestly higher driven by ongoing market share momentum and market size growth.

Genworth’s loss ratio benefited from favorable reserve development. Q3 total premiums written increased by 36% YoY, due to an increase in transactional mortgage originations and growing market share. The mortgage payment deferrals have also declined on a QoQ basis. It, however, experienced lower demand from lenders due to high levels of portfolio insurance in the second quarter after the onset of the pandemic.

The pace of economic recovery, the strength of the housing market, and a downward trend in the balance of mortgage payment deferrals should help the company steer well in the current crisis situation.

Dividends

Genworth Canada has a decade-long history of annual dividend increases each year making it a Dividend Aristocrat in Canada. The company has a decent payout ratio of ~45%, remaining almost the same as last year. Its annual average yield stands at an attractive 4.9% currently.

Genworth’s most recent annual dividend hike was 4%+. It also has a sound track record of share buybacks and paying periodic special dividends. The company returned a total of $608 million to shareholders during 2019 in the form of share buybacks, and ordinary and special dividends. It sports a 5-year dividend growth rate of 7.5% CAGR. Genworth has grown its EPS by more than 4% CAGR over the last decade. 

Genworth made a payment of $400 million of special dividends in the first quarter. There was no ordinary dividend increase or capital redeployment during the quarter due to regulatory prohibition. The company is in a good position to capitalize on organic growth opportunities given its MICAT ratio of 179%. Its 100% acquisition by Brookfield Business Partners (at a price of $43.50 in cash per common share) was approved by the shareholders of the company in December 2020.

Genworth’s book value per share stood at $43.39. The credit quality of its portfolio also remains strong. The company witnessed a moderate increase in average home price annually and has a limited exposure to loans with stacked risk factors.

Genworth has developed a high-quality, well-diversified insurance portfolio, which is designed to reduce performance volatility through all phases of the economic cycle. The company has been actively redeploying its excess capital as it focuses on capital efficiency. It has an estimated full-year loss ratio range of 15% to 25% due to strong rebound in employment levels and sound housing market.

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Competition

While Genworth competes with all the major Canadian banks, it actually handles a lot of the customers that are deemed risky for a bank which often consists of entrepreneurs or immigrants.

Genworth has formed long-standing relationships with lenders, mortgage brokers, realtors, builders and industry associations across Canada. This grants the company a strong competitive edge. Genworth has a leading market share among private mortgage insurers. A second wave of COVID-19 could lead to uncertainty.

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Bottom Line

Genworth Canada enjoys the reputation of a leading private sector residential mortgage default insurer and stands to gain from the robust Canadian housing market that has remained relatively resilient during the COVID-19 pandemic.

An increase in portfolio insurance opportunities, recovering housing market and market share gains should support higher total premiums written. Fundamentals remain supportive for first-time homebuyers in Canada and this trend is expected to continue in 2021.

Improving housing activity and a strong housing market act as strong enablers for Genworth MI Canada.

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