Genworth Financial Canada – An Update

Genworth-Financial-Canada Stock in Genworth Financial, Inc. (Stock symbol: GNW) is now near a buck-fifty—down about 94% in the last year.

That’s got many folks wondering how Genworth Financial Canada will fare.  Genworth Financial Canada (GFC for short) is the company’s Canadian mortgage default insurance subsidiary.

Here is what we know about its parent:

  • Like most U.S. insurers, Genworth Financial, Inc. (GFC’s U.S. parent) has been rocked with rising defaults, investment challenges and liquidity concerns. These are unprecedented times for the company and the industry as a whole.
  • On November 7 the company posted a $258 million 3rd quarter loss.
  • S&P and Moody’s cut Genworth’s overall credit rating, but did not cut the mortgage insurance subsidiaries’ ratings.
  • On Thursday, Genworth Financial, Inc. (the parent) had to draw upon backup credit facilities set up by JP Morgan. According to analysts, that should allow Genworth some breathing room until at least 2011.
  • On Sunday, Genworth announced it was buying a bank to help it qualify for federal financial aid. (Reuters Story)

Canada Things are vastly different in Canada.

  • Genworth Financial Canada (GFC) is highly profitable. Its latest quarterly earnings were up 16% to $80 million–thanks largely to higher revenues, growing investment income and continued low loss levels.
  • GFC is fully self-sustaining. In other words, it’s Canadian earnings and capital are more than enough to cover its obligations.
  • GFC is exceeding all of its OSFI capital requirements.
  • GFC has a solid AA credit rating from S&P and DBRS.
  • GFC’s capital is fully segregated from its U.S. parent. (Incidentally, all of Genworth’s financials are on OSFI’s website)

Here is what the company has said about its Canadian business in recent published reports:

  • “The loss ratio here [in Canada] continues to remain below pricing expectations.”
  • “Slowing mortgage originations…and …risk management action to limit loan-to-value levels in targeted [Canadian] geographies, combined with several product changes, resulted in lower new business productions [in the last quarter]. (SeekingAlpha)
  • “In Canada and Australia, new flow insurance written decreased 27 percent.”

(Flow insurance protects lenders and investors from borrowers who default on high-ratio mortgages.)

  • “The decrease in global mortgage securitizations also resulted in very limited bulk insurance sales in both Canada and Australia.”

(Bulk insurance protects lenders and investors from borrowers who default on conventional mortgages—those with 20% or more equity. Bulk insurance is also needed for lenders to get their conventional mortgages into the Canadian Mortgage Bond program—a critical source of mortgage capital. Despite this, bulk insurance is a very small part of GFC’s business.)

WSJ Here is what the Wall Street Journal said about Genworth last week:

  • The Journal wrote that Genworth may have to sell “international units at possible fire-sale prices.” The story quotes analysts as saying the likeliest units to “go up for sale include mortgage-insurance businesses in Canada and Australia.”

(Experts we spoke with feel the odds are remote that Genworth Financial Canada would be sold because it’s a cash cow and a core business for Genworth.)

The biggest issue currently facing private mortgage insurers, like GFC and AIG, is the competitive dynamic at work in this country:

  • In an SEC filing a while back Genworth said “CMHC, which is owned by the Canadian government and, as a sovereign entity, provides mortgage lenders with 100% capital relief from bank regulatory requirements on loans that it insures. In contrast, lenders receive only 90% capital relief on loans we insure.”
  • This is an issue that private insurers, Genworth and AIG, have been dealing with since they started. Many see it as an unlevel playing field that keeps Genworth and AIG from fully competing with CMHC.  That’s because lenders and investors want to know they’ll be repaid 100%, instead of 90%, in the unlikely event a private sector insurer defaults.
  • This challenge is being magnified much further by the global credit crisis.

On a positive note:

  • From what we can see, GFC appears to be a strong and stable entity, despite its parent’s tribulations.
  • Despite the current credit environment, we hear GFC is hard at work to bring new insurance products to market—as early as next spring.
  • Besides a strong balance sheet, GFC feels it has other advantages in its corner as well:
    • Educational initiatives are one important differentiator according to the company. Homeownership.ca and GFC’s professional development centre are two examples of this.
    • The company offers a “workout” program to help Canadians homeowners through hard times. The program helps borrowers deal with their mortgage payments when they’ve been struck with unforeseen setbacks like illness, divorce, job loss, etc. To date, 2,000 Canadian families have utilized the program and the number is growing as word spreads about it. Not only is it the right thing to do, but with mortgage default claims averaging an estimated $50,000 a pop, it makes economic sense help borrowers as well.
    • GFC has developed a Homebuyer Privileges program that is offered through selected len
      ders to borrowers who take out a Genworth-insured mortgage. The program includes savings on a range of moving and home-related products and services.

In closing, we need to toss in the standard disclaimer that things can change by the second in this business. Nevertheless, Genworth Financial Canada appears on solid ground and, to people like us who think insurer competition is the cat’s meow, that’s good to hear.

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