Genworth MI Canada Inc. (TSX: MIC) is one of the leading private-sector residential mortgage insurers in Canada and offers mortgage default insurance across the region. The Company has built a broad underwriting and distribution platform across the country that provides customer-focused products and supports services to the residential mortgage lenders and originators.

Q1FY20 Financial Highlight: Amidst a challenging macro scenario, Genworth reported a 10% y-o-y growth in the transactional premiums written on account of higher transactional new insurance written. Total premiums written stood at CAD 114 million, as compared to CAD 105 million in the previous corresponding quarter. Losses on claims stood at CAD 25 million, at par with Q1FY19 and an improvement over Q4FY19. While loss ratio came in at 14%, declined 1 percentage points from the previous quarter, primarily attributed to a decline in new delinquencies, net of cures. Net operating income declined marginally to CAD 117 million, as compared to CAD 119 million in Q1FY19, due to an increase in expense. Net income stood at CAD 95 million, as compared to CAD 97 million in pcp.

Q1FY20 Income Statement (Source: Company Reports)

Risks: A likely increase in unemployment rate owing to COVID-19 pandemic could result in higher defaults. Any such scenario is likely to impact the group’s performance adversely. 

Valuation Methodology: Price to Book Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendations: The stock of MIC plunged ~38% so far this year, amidst a sharp price correction across the Global equity market due to COVID 19 crisis. The Management recently commented that the Company is likely to retain its underwriting policy related to debt service ratio limits, minimum credit score and down payment requirements amidst a sectoral softness, which is likely to boost the business as the competitors are changing their guidelines according to challenging market conditions. The Group anticipates an increment within the portfolio insurance segment in the coming quarters, which is a key positive. The group is likely to benefit from the government initiatives such as the buying plans of CAD 150 billion of insured mortgage pools under the National Housing Act Mortgage-Backed Securities under Insured Mortgage Purchase Program and the recent rate cut by the central bank. The Company reported its leverage ratio at 15%, which is consistent with the company’s long-term target. Further, the stock is offering a dividend yield of ~6.7%, which is lucrative considering the current interest rate environment. We have valued the stock using Price to Book value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered industry (Insurance) median on NTM basis. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 32.13 on 24 June 2020.

MIC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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