MIC.CN Stock Pitch

weIMG Stock Pitch Presentation

March 6, 2010
richmond@chicagobooth.edu

Long Idea: Genworth MI Canada (MIC:CN)
• MIC is the largest private residential mortgage insurer in Canada, and
has been in business since 1995
Underwriting and distribution platform services a vast majority of residential
mortgage lenders and originators across Canada
Pure play residential mortgage underwriter Current Price: $C 27(1)
1 Yr. Target Price: $C 33
Expected Return: ~ 21%
• Investment thesis:
Consensus estimates for 2010 earnings, which anticipate an increase in loss
expense from a fall out in Canadian housing, are too conservative
Sell side estimates based on either applying % YoY change on P&L accounts, or
by simple regression (inappropriate b/c of lack of data points)
A bottoms up analysis that incorporates a drop in average house prices, slow
down in new & existing home sales, and a rise in the foreclosure rate to an all-
time high, reveal that losses will be at the low end of management guidance
MIC’s share price already reflects significant losses for 2010; if actual losses are
less than expected, we will likely see MIC’s earnings and multiple expand
(1) Based on the five-day average closing price between 3/01/2010 and 3/05/2010.

2 richmond@chicagobooth.edu

Fundamentals & Valuation
• Preliminary 2009 results:
Underwrote insurance on $C 18 billion worth of mortgages in 2009.
Policies in-force at end of 2009: $C 224 billion (~25% of Canadian market)
MIC surprised by reporting a sequential decline in its loss ratio – demonstrating the
effectiveness of its loss mitigation measures related to workout activities
Cash and investments of $C 4.4 billion vs. technical reserves of $C 2.1 billion

• Capitalization:
Enterprise value(1): $C 2.9 billion
Equity market value: $C 3.2 billion
No debt; Cash of $C 378 million
Excess regulatory capital of just over $C 600 million (or ~$C 6/share)

• Consensus implied valuation multiples:
Forward P/E in 2010: 11x ; 2011: 10x
Forward P/BV in 2010: 1.2x; 2011: 1.1x

(1) Includes unfunded pension & OPEB obligations of $11 million; capitalized value of operating lease is de minimis.


Inefficiencies + Pessimism = Mispriced Stock
• Lack of coverage from the sell-side
None of the sell side analysts attempted a “bottoms-up” analysis of the Canadian
mortgage market to estimate claims loss
Applying traditional analytics on P&C insurers (and US mortgage insurers) does not
work; MIC operates in a very unique market

• Many US institutional investors unfamiliar with Canadian equity market

• Uncertainty clouds the Canadian residential housing market
Valid arguments made by both sides re: whether market is in a “bubble”
When it comes to evaluating MIC, the best approach is to assess the strength of its
balance sheet to weather anticipated losses

• Investors still pained by losses from the US sub-prime market
MIC is being unjustly painted with the same brush
Retaining the “Genworth” (TARP recipient in the US) name is not helping MIC


Key Assumptions for 2010 Base Case
• YoY% change in unit sales: 0% (2009 pace is pre-04 level)
• For both new and existing homes
• 19 year average YoY % change: +1.1% for new homes; +3.6% for existing homes

• YoY% change in average sales price: -12% (to adjust prices to pre-06 levels)
• For both new and existing homes
• 19 year average YoY % change: +4.3% (for both new and existing)

• Foreclosure rate on total insurance in-force: 100 bps
• Assumed that all delinquent loans will be foreclosed (very conservative)
• 19 year average delinquency rate is ~40 bps (high: 64 bps; low: 19 bps)

• Net earned premium as a % of beginning unearned premium reserve: 27.5%
• 5 year average: 26.5% (30.6% in 2009)
• 100 bps added to reflect impact of change to premium recognition curve in 2009(1)
(1) MIC submitted a change to its premium recognition curve in 2009 due to an expectation of accelerated loss
development; the change was approved by OSFI – the insurance regulator in Canada


Key Assumptions for 2010 Base Case (cont’d)
• Market share on new residential mortgage originations: 25%
• Regained market share to “Mid to high 20%” in Q4 2009 after falling to “low 20s”
early in the year during the apex of the credit crisis

• Interest on investments: 4.25%
• Duration cut on investments, and Bank of Canada is expected to hold rates steady
at 0.50% until at least Q3 2010

• Increase dividends by 20%
• MIC currently has excess regulatory capital
• Management indicated that an announcement will be made during Q2 2010
regarding plan(s) to deploy excess cash


Bottoms Up Estimate of 2010 Claims Loss
High LTV mortgages in-force ($CAD millions) $ 177,905
Less assumed principal pay down % -2.3%
Consensus est. of $255m,
Roll forward value for 2010 $ 173,902 implying 10bps difference in
Plus new mortgages insured in 2010 $ 18,069 loss ratio (0.35 vs. 0.45);
Estimated high LTV mortgages in-force at 2010 $ 191,971
mgmt guidance: 0.35 to 0.40
Vintage Value Foreclosure Severity
Year % in-force Rate 2010 Loss Exp
60% of mortgages in- 2006 12.0% $ 21,349 1.0% 1.5% $ 3.1
force at end of 2009 were 2007 24.0% $ 42,697 1.0% 20.3% $ 86.8
originated from ‘06 to ‘09 2008 15.0% $ 26,686 1.0% 22.0% $ 58.7
2009 9.0% $ 16,011 1.0% 26.2% $ 41.9

2010 loss expense ($CAD millions) $ 190.5

Assumed foreclosure
rate exceeds
delinquency rate

• Severity represents the actual claim paid by MIC as a % of the total
insured amount. Using data from MIC’s filings and Canadian mortgage
and statistical agencies, severity ratio was estimated by comparing the
average home price (adjusted for appreciation or decline) in each
vintage year, against the average unpaid mortgage principal balance
(including fees, taxes, and 12 months of unpaid interest)
• Mortgages were assumed to be amortized over 25 years, and a fixed
rate of 6% for a five year term (paid monthly).


Valuation
• Comparables analysis not applicable
• No other publicly traded monoline insurer in Canada
• US comps distorted by differences in US and Canadian residential mortgage
insurance market; Canadian banks and insurers also trade at a premium (~20% on
both P/E and P/BV) to their US peers

• Decision tree analysis (multiples approach)
• Weighted average probability of MIC’s 2010 EPS under 4 possible scenarios
• Adjusted key assumptions to determine EPS impact

• DCF analysis
• Reflects assumptions that supports “base case” scenario in the decision tree
analysis


Decision Tree Analysis: Basis for Target Price
Loss 2010e Value % P/ '10e RoE Expected
Scenario Description Ratio EPS P/E Comment p/sh Chg BVPS 10e P(n) % Rtn.

Bull Case 27% mkt share; 0.8% Foreclosure 27% $2.95 13.5x High P/E of US Monolines $39.83 48% 1.6x 12.0% 10% $3.98

Consensus 45% Loss Ratio for 2010 45% $2.50 10.0x Median P/E of Cdn insurers $25.03 -7% 1.0x 10.5% 30% $7.51

Base Case 1% Foreclosure rate; 0% YoY 34% $2.72 13.5x High P/E of US Monolines $36.75 36% 1.5x 11.2% 50% $18.38
homes sold; -12% YoY avg prices Premium on Canadian insurers

Bear Case 22% mkt share; -15% YoY homes 60% $1.85 10.0x Median P/E of Cdn insurers $18.50 -31% 0.8x 7.9% 10% $1.85
sold & avg price; 1.5% foreclosure 100% $31.72

Share Price $27.0 Expected Return $31.72
Market Cap $3.2bn Plus Dividends $1.06
P/E '10e 9.9x Total Return $32.77
P/E Cons '10e 10.8x Share Price $27.00
P/BVPS 1.1x % chg 21.4%
ROE '10e 11.2%

Applying the weighted average probabilities into the likely outcomes affecting MIC’s
2010 earnings, the result suggests upside of ~21% from its current share price
(vs. ~41% for the base case scenario)


Long Term Value Embedded in the “Base Case”
Terminal
2009a 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e Value
Net earned premiums $ 557 $ 547 $ 542 $ 548 $ 553 $ 564 $ 576 $ 587 $ 599 $ 611 $ 623
% chg yoy -22% -2% -1% 1% 1% 2% 2% 2% 2% 2% 2%
Combined ratio 0.512 0.422 0.393 0.550 0.550 0.570 0.570 0.570 0.570 0.570 0.570
Expense ratio 0.170 0.170 0.170 0.200 0.200 0.210 0.210 0.210 0.210 0.210 0.210
Claims ratio 0.342 0.252 0.223 0.350 0.350 0.360 0.360 0.360 0.360 0.360 0.360
U/W profit 271 317 329 247 249 243 248 253 258 263 268
- Margin 0.488 0.579 0.607 0.450 0.450 0.430 0.430 0.430 0.430 0.430 0.430
Investment income 184 187 207 175 177 186 190 194 198 202 206
% of NEP 33% 34% 38% 32% 32% 33% 33% 33% 33% 33% 33%
Insurance profit $ 455 $ 504 $ 536 $ 422 $ 426 $ 429 $ 438 $ 446 $ 455 $ 464 $ 474
Insurance margin 81.8% 92.0% 98.8% 77.0% 77.0% 76.0% 76.0% 76.0% 76.0% 76.0% 76.0%
Tax provision (137) (151) (161) (127) (128) (129) (131) (134) (137) (139) (142)
Tax rate % 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%
FCFE $ 379 $ 319 $ 353 $ 375 $ 295 $ 298 $ 300 $ 306 $ 312 $ 319 $ 325 $ 332 $ 5,394
Equity $ 2,643 $ 2,838 $ 3,055 $ 3,281 $ 2,395 $ 2,096 $ 1,796 $ 1,949 $ 2,105 $ 2,265 $ 2,427 $ 2,593
% chg yoy 7% 8% 7% -27% -12% -14% 9% 8% 8% 7% 7%
Dividend 28 124 136 150 1,181 597 601 153 156 159 163 166
DPO 7% 39% 39% 40% 400% 200% 200% 50% 50% 50% 50% 50%
RoE 14% 12% 12% 12% 10% 13% 15% 16% 15% 15% 14% 13%
NPV $ 306 $ 311 $ 304 $ 220 $ 204 $ 189 $ 177 $ 166 $ 156 $ 146 $ 137 $ 2,133

Sum of NPV $ 4,447
Less debt $ - Reflects need to return
Implied equity value $ 4,447 WACC of 8.8% used assuming RFR of 4%;
excess capital to
# of shares o/s
Implied per share value
117.1
$ 37.98 shareholders (or pursue 4% risk premium; and beta of 1.2
Current share price $ 27.00 M&A opportunity) to
Upside % 41% sustain “mid-teens” ROE


Key Risks to the Investment Thesis
• “Double dip” recession
Probability: LOW to MODERATE
Economy is highly levered to commodity markets; global slowdown = trouble

• US style housing blow up in Canada
Probability: VERY LOW
Radically different market, conservative lending, low inventory, lender recourse, etc

• Lending “cap” for private mortgage insurers is not increased
Probability: LOW
Cap increased in the past when near limit; can’t have a government monopoly

• New competition enters the market
Probability: LOW
High barriers to entry; potential competitors were US mortgage insurers

Down side risk if the thesis is wrong: 28% based on MIC’s current price


Appendix


Tale of Two Countries: Canada vs. US Mortgages

• Other distinguishing features of the Canadian mortgage market:
– Canadian lenders have more conservative underwriting practices vs. US lenders
– More emphasis on relationship based lending
– Lenders can attach personal assets and/or garnish wages if loan is deficient
– Annual principal repayment is limited (and costly), which limits refinancing


Canadian Housing Market Charts
YoY % Change in Units Sold & Average Price: Existing Homes
30%

25%

20%

15%
Base case estimate for
10%
YoY %change in units sold
5%

0%
1991 1994 1997 2000 2003 2006 2009F
-5%
Base case estimate for
-10%
YoY %change in average
selling price -15%

-20% Number of Units Average Price

96% 30%

94%
20%
92%

90% 10%

88%
0%
Base case estimate for 86%
YoY %change in # of new 84%
-10%

homes sold 82% -20%
80%
-30%
78%

76% -40%
1991 1994 1997 2000 2003 2006
Unit Sales as a % of Completions (LHS) YoY %Chg # of New Homes Sold (RHS)


Canadian Residential Mortgage Market Charts
$3,000 Gross Written Premiums - Residential Mortgage Insurance

GWP - Residential Mortgage Ins $2,500 722
CAGR 997 374
MIC Market $2,000
1995 to 2009 45% 12%
504 471 604
2004 to 2009 -6% 5%
$1,500 282 385
200
MIC lost market share in ’08 and ’09 b/c: $1,000 146
2,132 2,090
86 105 141 1,740
1,492
1) Gov’t ban on mortgages with terms of 29 1,285 1,203
1,446 1,383
$500 1,049
35 yrs+ 2 828 865 898 850
611
480
2) Banks fear that MIC would not be able $0
to stay afloat to provide coverage on 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F
future claims CMHC Genw orth Canada

Proportion of GWP Written by Year
100% 0% 5%
9% 11% 14% 14% 16% 18%
24% 26% 24% 25% 25%
30%
Base case assumed MIC’s 80% 36%

market share of 25% in
2010
60%

40%

20%

0%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009F
CMHC Genw orth Canada


MIC is Overpaid to Insure Residential Mortgages
MIC’s Policies in force as at March 31, 2009

Mortgage Insurance Premium Grid Unemployment Rate vs. Mortgage Delinquency Rate

Average of 200bps for
premiums vs. long run avg
delinquency rate of 40bps


Conservatively Managed Investment Portfolio

~75% of investments are rated AA and higher
Portfolio duration of 3.1 years (vs. 5 yrs at Y/E 2008)
Book yield of 4.0%


Owners of Genworth MI Canada’s Stock
Ownership Summary
Type # of Common Shares Held % of Shares Outstanding Market Value (CAD in mm)
Institutions 90,642,841 77.40 2,515.3
Hedge Fund Managers - - -
Corporations 1,000 0.00 0.0
Insiders 66,025 0.06 1.8
ESOPs - - -
Corporate Foundation - - -
Public and Other 26,393,135 22.54 732.4
Total 117,103,001 100.00 3,249.6

Genworth (GNW.US) controls
~57.5% of MIC’s stock

Top 5 Holders
Holder # of Common Shares Held % of Shares Outstanding Market Value (CAD in mm) Position Date
Genworth Financial Asset Management, Inc. 67,325,900 57.49 1,858.7 Jul-30-2009
Fidelity Investments 6,123,100 5.23 169.0 Nov-30-2009
Phillips, Hager & North Investment Management Ltd 3,626,700 3.10 100.1 Nov-30-2009
CI Investments Inc. 3,230,900 2.76 89.2 Sep-30-2009
I.A. Michael Investment Counsel Ltd. 1,417,500 1.21 39.1 Dec-31-2009

Source: Capital IQ


MIC vs. S&P TSX (Q2 2009 – YTD 2010)

Outperformed S&P TSX
by over 30% since IPO

52 wk High: $C 17.30
52 wk Low: $C 30.50
IPO price: $C 19.00


MIC.CN Stock Pitch

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