Summary
Genworth Financial (NYSE:GNW) completed an IPO of their Canadian operations in a bid to raise capital to pay down debt at the parent company. The mortgage insurer’s Canadian offering raised at least C$850 million (44.7mm shares priced at C$19 per share and the underwriters have the option to sell an additional C$127mm (6.7mm shares) up until August 6th). If the option is exercised in full, Genworth Financial would have a 56% ownership interest in Genworth MI Canada (TSX:MIC). This is the largest IPO in the Canadian marketplace since 2007, when gold miner Franco-Nevada raised C$1.3bn, and is only one of a handful of IPO’s completed in Canada YTD.
Analysis
The Canadian mortgage insurance market is concentrated, with three main participants; Canadian Mortgage and Housing Corporation (CMHC), Genworth MI Canada, and AIG United Guaranty. CMHC is a wholly-owned crown corporation and is the largest mortgage insurer in
High-ratio mortgages (LTV>80%), account for slightly less than half of all mortgages originated in Canada, and are a major reason why Canada has one of the highest home ownership rates in the world. Mortgage insurance premiums are paid by the homebuyer on the basis of the amount of the downpayment, and not on the basis of creditworthiness or geographic location. “Non-conforming loans” (which includes near and sub-prime loans) represented only about 5% to 8% of all mortgages written in
In my opinion, the increased competition in the Canadian mortgage insurance market has greatly benefited Canadians and resulted in a number of positive changes within the mortgage default market, including; more affordable premiums (since 2003 mortgage default insurance premiums have dropped roughly 30%), the elimination of almost all mortgage insurance application fees, and product innovations that have assisted new immigrants and self-employed borrowers.
The Canadian government “back-stops” private insurers in the Canadian marketplace in the event of insolvency. Lenders receive 90% capital relief on loans Genworth MI Canada insures; whereas CMHC, being a crown corporation, provides mortgage lenders with 100% capital relief from bank regulatory requirements (Office of The Superintendent of Financial Institutions (OSFI)) on loans that it insures. Many believe this difference represents an unfair and uneven playing field that prevents Genworth MI Canada (or others) from fully competing; as lenders and investors want to know that they will be repaid 100% (instead of 90%) in the unlikely event a private insurer defaults. This is an issue the private insurers have been, and continue to deal with since they entered the Canadian market. Back in February of this year when the Federal Government (Conservative Party) released their Federal Budget, it was thought that the Government may announce 100% backing for Genworth MI Canada and AIG, but it did not. Both companies however are still in discussions with the Government in the hope of persuading a change in policy on this issue, but the dialogue remains a work in progress. Private insurers pay for their government guarantees, they’re not free, and there is widespread belief that both Genworth MI Canada and AIG United Guaranty would probably be willing to pay even more, if needed, to compete on the same plane as CMHC.
The reality is that the Canadian mortgage insurance business is a good business, and Genworth MI Canada is no exception, and the company has made significant inroads since entering the Canadian market. As at the end of Q1/09, Genworth Financial’s Canadian subsidiary had approximately C$5bn in assets, excess capital available over capital required of close to C$500mm, and total capital available as a % of minimum capital required of 134.19. The bottom-line is that the timing of this IPO was unfortunate, as equity markets have been retrenching as investors rethink the recovery story that has driven markets higher in recent months; Genworth MI Canada is a good company, with a good business model, and if the IPO was priced correctly, then those investors (both retail and institutional) who did not participate in the IPO are likely to be strongly considering stepping in the open market at current price levels.
