Genworth MI Canada Inc.

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.

Acquisition update:

• On October 26, MIC announced that it has entered into a definitive arrangement agreement pursuant to which Brookfield Business Partners will purchase all of the outstanding common shares of the Company that are not already owned by Brookfield.
• Brookfield, which owns approximately 57% of the common Shares will purchase the remaining share at a price of CAD 43.5 per Common Share in cash pursuant to a court-approved plan of arrangement.
• The purchase price reflects ~22% premium to the company's closing share price on the Toronto Stock Exchange on October 23, 2020, and a premium of ~25% to the 20-day volume-weighted average price on that date.
• The Company's board of directors, other than certain conflicted directors, unanimously approved the Arrangement Agreement following a unanimous recommendation of a special committee of independent directors.
• The Transaction is expected to close in the first half of 2021.
• MIC is permitted to continue paying its regular quarterly cash dividend of CAD 0.54 per Common Share, consistent with its dividend policy and past practice, until closing of the Transaction.
• Following closing, the Company intends to continue to satisfy the public float requirement of the Insurance Companies Act through the issuance of a new class of publicly-traded voting preferred shares of the Company.
• The Common Shares to be acquired by Brookfield pursuant to the Transaction will be purchased by a wholly-owned subsidiary of Falcon Holding LP, an affiliate of Brookfield Business Partners L.P, for aggregate consideration of approximately CAD 1.6 Billion.
• Upon closing of the transaction, Brookfield intends to cause the common shares to cease to be listed on the Toronto Stock Exchange.

Q2FY20 Financial Highlights:

• MI declared its second-quarter results, wherein the business recorded premium earned of CAD 172 million, up 2% on y-o-y basis.
• Net operating income stood at CAD 101 million, down 16% on y-o-y basis. The decline was due to a higher loss on claims and lower investment income, while higher premiums earned, and lower expenses supported the performance.
• Net income, during the quarter, stood at CAD 98 million, down 11% on y-o-y basis, due to lower net operating income, partially offset by a lower level of realized and unrealized losses from investments.
• The company reported its regulatory capital ratio at ~169%, up 12 percentage points than the Company's internal MICAT ratio target of 157%.                      

Q2FY20 Financial Snapshot (Source: Company Reports)

Risks: Due to the current challenging environment, the company’s insurance premium collection could be adversely impacted, which might result in a lower premium earned in the coming quarters.

Valuation Methodology: Price to Book Value Based (Illustrative)

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

Stock Recommendation: The stock soared ~24% on October 26, 2020 on account of acquisition news. Brookfield will purchase the remaining share at a price of CAD 43.5 per common share. Also, upon closing of the transaction, Brookfield intends to cause the common shares to cease to be listed on the Toronto Stock Exchange. Since the stock is trading above the expected purchase price, we suggest investors to book profit and exit the stock. We have valued the stock using Price to Book value-based relative valuation method and have arrived at a target downside of lower double-digit (in percentage terms). For the said purposes, we have considered industry (Insurance) median on NTM basis. Hence, we recommend a ‘Sell’ rating on the stock at the closing market price of CAD 44.18 on October 26, 2020.

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

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