Brookfield Asset Management Inc.'s private equity arm is upping its bet on Canadian mortgage insurance, offering to buy the remaining stake in Genworth MI Canada that it does not own for $1.6-billion.
Genworth is Canada’s largest private-sector mortgage insurer, providing a backstop for lenders against defaults in residential mortgage loans. Toronto-based Brookfield Business Partners LP, a publicly traded subsidiary of the global asset manager, bought a 57-per-cent stake in Genworth Canada from its U.S. parent company last year for $2.4-billion. On Monday, it said that it would acquire the remaining 43 per cent from other shareholders, taking the company private.
Brookfield is offering Genworth shareholders $43.50 a share, a 22-per-cent premium to the stock’s closing price on Friday. Genworth’s stock price rose 24 per cent on Monday.
The deal comes at a moment of uncertainty for the Canadian mortgage market, which has been propped up during the COVID-19 pandemic by payment deferrals from lenders and income support from the federal government. Lenders and insurers are expecting mortgage defaults to rise as support programs wind down.
Brookfield, however, is approaching the deal as a long-term investment and is less concerned about the immediate impact of the pandemic.
Canadian homebuyers with down payments of less than 20 per cent are required to take out mortgage insurance. In 2019, Genworth had a 33-per-cent share of the Canadian mortgage insurance market, according to data from RBC Dominion Securities Inc.
Genworth, which recently rebranded as Sagen MI Canada, operates in a highly consolidated sector in which its main competitors are the Canada Mortgage and Housing Corp. (CMHC), a Crown corporation, and Toronto-based Canada Guaranty Mortgage Insurance Co.
In July, CMHC tightened its insurance criteria to discourage homebuyers from taking on more debt than they can afford, imposing a minimum credit score and disqualifying people who borrowed for their down payment. Private-sector insurers, such as Genworth and Canada Guaranty, elected not to follow suit, prompting CMHC chief executive officer Evan Siddall to pen a sharply worded letter to lenders warning of CMHC’s declining market share and asking them to “put our country’s long-term outlook ahead of short-term profitability." by doing more to restrict risky lending.
On Genworth’s most recent earnings call, CEO Stuart Levings said the company was confident in its existing risk management framework and underwriting policies, and expected to see “an increase in our market share over the next few quarters” as a result of not following CMHC’s more stringent approach.
The acquisition is the second insurance deal by a Brookfield company this month. Last week, Brookfield Asset Management said it would buy a 19.9-per-cent stake in U.S. retirement insurance provider American Equity Investment Life Holding Co. for at least US$750-million.
For the Genworth deal, Brookfield Business Partners will fund approximately US$460-million of the acquisition, while its institutional partners will fund the rest, the company said in a news release.
Desjardins analyst Gary Ho said in a research note Monday that “the $43.50 offer price is at the lower end of the fair market valuation range of $43 to $48 per share," according to a valuation report prepared by a third-party financial adviser.
“We believe there could be various benefits to taking the company private, including better execution of operational improvements, enhancing the return profile and reducing public company costs,” he said.
The deal still needs approval from Genworth shareholders, who are expected to hold a special shareholder meeting in late December to vote on the issue. The transaction is also subject to court approval and approval by the federal Minister of Finance.
Also on Monday, a Blackstone-run real estate income trust announced that it would acquire Simply Self Storage from Brookfield Asset Management for around US$1.2-billion.
Mark Rendell